Favourite to be Spanish PM pleads for breathing space

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The front-runner to be Spain's new prime minister, Mariano Rajoy, pleaded with markets to give Sunday's election winner "more than half an hour" to confront an economic crisis, as borrowing costs soared to record levels.

As the opposition leader spoke on Friday, investors sent Spain's 10-year bond yield and its risk premium -- the extra interest rate investors demand over safe-haven German debt -- surging to new euro-era highs.

"This is extremely bad for Spain's interests," the 56-year-old Rajoy said in an interview with Onda Cero radio.

"We hope that this will stop and that they realise that there are elections here and that those who win these elections have the right to a minimum margin, which should be of more than a half hour," he said.

Rajoy's conservative Popular Party is expected to win in a landslide over the ruling Socialists and their candidate Alfredo Perez Rubalcaba, blamed for economic stagnation and an unemployment rate of 21.5 percent.

Markets seemed to take little comfort from the expected change in government.

The yield on Spanish government 10-year bonds peaked at 6.90 percent -- the highest since the single currency was created -- from 6.487 percent at the close on Thursday.

The debt risk premium shot to a euro-era high of 503.4 points, after closing Thursday at 459.5.

Spain's borrowing rates are now at levels widely considered to be at the limit of what a country can afford to finance its public sector debt over the long term.

Analysts said the new government must send a strong message that it has a grip on the public finances if it is to prevent an even fiercer market storm battering Spain.

"If the markets think the new government is not going to act with the necessary determination, they will raise the risk premium further," said Daniel Pingarron, analyst at trading house IG Markets.

"They will force the new government to take the austerity measures more seriously."

Rajoy has vowed to make cuts "everywhere", except for pensions, so as to meet Spain's target of cutting the public deficit to 4.4 percent of gross domestic product in 2012 from 9.3 percent last year.

"We are going to comply with our deficit obligations," Rajoy told Onda Cero.

Latest polls showed the Popular Party with a lead of about 15 percentage points over the Socialists, enough to deliver an absolute majority of the 350-seat lower house Congress of Deputies.

A win on that scale would give Rajoy a free hand for reforms after assuming power December 20.

"If the government emerging from the election achieves an absolute majority, we consider it highly probable that as early as next week it will announce a package of key reforms aimed at regaining credibility over the economy," analysts from Bankinter bank said in a report.

The new government would reform labour laws, taxes and the financial sector, the analysts said.

Since 2010, the ruling Socialists have cut public sector salaries by five percent, frozen pensions and raised the retirement age, prompting nationwide street protests.

© 2011 AFP

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