Spain set to swing right, stalked by debt threat

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Spain's Conservative leader Mariano Rajoy is set for a crushing win in Sunday's general election, but will come under instant pressure to convince investors that he can strengthen its public finances.

Rajoy and his conservative Popular Party are expected to beat Socialist Alfredo Perez Rubalcaba by a wide margin when voters punish the Socialists for their economic woes, with unemployment at more than 21.5 percent.

His promises of further tough spending cuts have not stopped him opening a wide lead in the polls, but financial markets have raised the stakes by pushing up rates on government bonds to euro-era records ahead of the vote.

Rajoy has avoided scaring voters with details of his austerity plans but analysts say the rise in debt costs will force him to flesh them out quickly, to reassure its lenders that Spain will not need to be bailed out.

"We must make cuts everywhere" except in pensions, said Rajoy, 56, in an interview published Thursday in El Pais newspaper. "Spain needs to send a message that it takes the issue of the public deficit seriously."

The cost for Spain to borrow money crept up to dangerous levels in the days before the election. Similar pressures have already prompted changes of government in Italy and Greece.

On Thursday Spain's Treasury had to pay a rate of 6.975 percent on its 10-year bonds -- near the levels that prompted Greece, Ireland and Portugal to seek help from the EU and International Monetary Fund.

Its key debt risk premium hit a euro-era record of 4.99 percentage points.

The latest polls suggested the PP could win an absolute majority in parliament, strengthening Rajoy's hand for reforms if he officially takes over as prime minister on 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 note.

They expected reforms to labour laws, taxes and the financial sector.

Measures brought in by the current Socialist government have already cut public sector salaries by five percent, frozen pensions and raised the retirement age, prompting street protests.

In the latest of these, thousands of doctors, teachers and students marched in Madrid and Barcelona in several demonstrations against cuts to education and healthcare budgets by PP-led regional governments.

After seven years of Socialist rule, Spain's unemployment rate is the highest in the industrialised world at more than 21.5 percent, with nearly five million people jobless, and many voters disillusioned.

"The situation in Spain is bad, awful," said Alberto Jaray, 38, who sells sweets on a Madrid street.

"And these elections are a farce. The two main parties are both liars. They are only interested in the banks, the big companies."

Analysts said the new government's imperative in the weeks after Sunday's election will be to send a strong message that it has a grip on the public finances to prevent jitters over Greece and Italy spreading to 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."

Other voters seemed resigned to more austerity.

"The Popular Party is going to win and what's more it will have to take very drastic economic measures," said Federico Cres, 43, an airline worker in Madrid.

"The current government took them late. It should have taken them much sooner."

© 2011 AFP

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