Spanish deficit alarm grows

2012-03-26 17:26

Madrid - Spain's ruling conservatives wrestled on Monday with a surprise electoral setback, a looming general strike and growing alarm in Europe over the public deficit.

Concern over Spain's ability to meet its deficit-cutting goals spread to the markets, leading the Madrid stock market's IBEX-35 index to tumble 123.40 points, or 1.49%, to 8 158.40 by early afternoon.

The deficit challenge appeared to grow after Prime Minister Mariano Rajoy's right-leaning Popular Party unexpectedly failed to secure power in elections on Sunday for the southern region of Andalusia.

Defying poll predictions that it would win an absolute majority, the Popular Party took 50 of the regional parliament's 109 seats.

The Socialists won 47 seats and can remain in power if, as expected, they strike an alliance with the United Left party which managed to double its seats to 12.

Spain's press said voters in the region, where the unemployment rate tops 31%, had reacted against the government's austerity cuts and labour market reforms.

Growing doubts

"For the head of government, the time for real decisions has come," said the daily El Pais.

"The elections are over and Thursday's strike is the only event on the timetable before presentation of the budget, which will show the extent of his plans in the face of the poor economic outlook and growing doubts over the finances," it said.

Unions have called a national strike for Thursday to protest the labour reforms, which weaken industry-wide work contracts and make it cheaper to lay off workers.

On Friday, the government announces its 2012 budget, which must set out how Spain will slash the public deficit to 5.3% of annual gross domestic product from 8.51% last year.

After last year's deficit overran Spain's 4.4% target by a wide margin, Rajoy managed to negotiate with Brussels an easing of the 2012 deficit goal.

But the budget slippage under his government, which took power in December and now faces an economy sliding into recession, is causing increasing worry on financial markets and in Brussels.

Crisis of confidence

"Given the failure of Prime Minister Rajoy's People's Party to win an absolute majority in the regional election in Andalusia yesterday, it is clear that domestic political support for deeper spending cuts is simply not there at present," said Neil Mellor, analyst at BNY Mellon Global Markets Research.

"Given Spain's 'too big to fail' status, this makes for a telling battle in the weeks ahead," he said in a report.

Spain's European partners warned at the weekend that further deficit slippage in Spain could ignite a new crisis of confidence in sovereign debt across the eurozone.

Italian Prime Minister Mario Monti said on Saturday that European Union concerns about Spain had sent borrowing rates up on bond markets, warning "it takes very little for contagion to quickly spread".

The Spanish government 10-year bond yield, a key gauge of market confidence, recovered slightly, falling 0.0606% to 5.3116% while Italian 10-year bond yields eased 0.0356% to 5.0082%.

EU Commissioner for Economic Affairs Olli Rehn noted at the weekend that Spanish government bond yields now exceeded those of Italy. "That illustrates how fragile the situation still is," he said.

- AFP