Spain's Deficit Fight Risks Setback as Zapatero Bows Out of 2012 Election

Spain’s efforts to reduce its budget deficit and rebuild investor confidence may suffer a setback as Prime Minister Jose Luis Rodriguez Zapatero bows out of next year’s election.

Zapatero, 50, said on April 2 he won’t seek a third four- year term, forcing his party to select a new candidate a year before March 2012 elections. The Socialists, which are trailing the opposition in opinion polls, will hold primaries after regional and local elections on May 22, Zapatero told party members in the capital Madrid.

“It means he’s no longer a relevant figure, so I think this may be really problematic from a policy-making perspective over the coming year,” said Ken Dubin, a political science professor at Carlos III University in Madrid.

Investors had rewarded Zapatero’s austerity package, Spain’s toughest in three decades, sending the country’s borrowing costs lower even as bond yields in neighboring Portugal soared to euro-era records. The currency bloc’s fourth- largest economy now faces a period of political uncertainty that may disrupt measures crucial to Spain’s fiscal survival.

“The politics are turning more difficult,” said Stuart Thomson, a Glasgow-based fund manager at Ignis Asset Management, which oversees about $120 billion. “There has been a lot of money coming into Spain; it started to underperform on Thursday and Friday and I suspect that underperformance will continue as a result of this.”

Photographer: Denis Doyle/Bloomberg

Jose Luis Rodriguez Zapatero, Spain's prime minister. Close

Jose Luis Rodriguez Zapatero, Spain's prime minister.

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Photographer: Denis Doyle/Bloomberg

Jose Luis Rodriguez Zapatero, Spain's prime minister.

Santander Plea

The gap between Spanish and German 10-year bonds narrowed to 191 basis points today from 194.1 basis points on April 1, compared with a euro-era record of 298 basis points on Nov. 30. The extra yield on Spanish bonds over Italian debt widened to 51.6 basis points, compared with 51 basis points on April 1 and 40 basis points at the start of last week.

Banco Santander SA Chairman Emilio Botin had asked Zapatero to wait until 2012 to announce his plans to avoid damaging market sentiment, according to an El Pais March 26 report.

Spain is the latest in a list of euro-area countries facing political upheaval after voters in Ireland ejected the Fianna Fail government from office in the wake of a bank crisis that left it in need of an 85 billion-euro ($121 billion) bailout. In Germany, Chancellor Angela Merkel’s Christian Democrats have been punished in local elections as voters balk at the prospect of funding bailouts elsewhere in Europe.

Bank Overhaul

Portuguese Prime Minister Jose Socrates resigned on March 23 after failing to win support for austerity measures. Fitch Ratings Ltd. last week cut Portugal’s credit grade to BBB-, one level above junk. The company, which warned more downgrades may follow, said Portugal needs “external support.” Fitch rates Spain AA+, its second-highest grade.

Spain is trying to restructure its savings banks after a property-market slump left many with surging bad loans. Twelve lenders need to raise as much as 15.2 billion euros to meet new minimum capital standards set by the government.

The planned bank overhaul suffered a blow on March 30 when a merger with Caja de Ahorros del Mediterraneo (CAM) fell apart, pushing the lender to seek a 2.8 billion-euro state bailout.

Zapatero, a Socialist who in 2005 said he slept with his union card by his bed, made a policy U-turn in May amid Greece’s fiscal crisis. He cut public wages 5 percent, reduced pensions and benefits and pushed labor-market reforms that made it cheaper for companies to fire workers.

Highest Unemployment

Those measures, while popular among investors, prompted the first general strike in eight years and undermined the ruling party’s popularity. The highest unemployment rate in Europe, at more than 20 percent, has also eroded support for the Socialists.

The number of people registering for jobless benefits rose for a third month in March, the Labor Ministry said today. Consumer confidence in March declined to the lowest level this year, according to a separate report from Instituto de Credito Oficial.

The opposition People’s Party led by Mariano Rajoy enjoys 44.1 percent voter support, compared with 28.3 percent for the Socialists, according to an April 3 El Pais poll.

The favorites to succeed Zapatero are Deputy Prime Minister Alfredo Perez Rubalcaba followed by Defense Minister Carme Chacon, the El Pais poll showed.

‘Safe Option’

Chacon, a 40-year-old Catalan who became Spain’s first female defense minister in 2008 while pregnant, would be the best option in terms of “regenerating the party and presenting a fresh face,” even though her candidacy could be “divisive,” said Alejandro Quiroga, a Spanish politics professor at Newcastle University in the U.K. Rubalcaba, a 59-year-old veteran of former Prime Minister Felipe Gonzalez’s administration who is also interior minister and government spokesman, would be the “safe option,” he said.

Rubalcaba will ask Chacon not to run in the primaries and in exchange will cede the party leadership to her after the 2012 election if the Socialists lose, El Confidencial reported today, citing people close to Rubalcaba it didn’t name. The primary elections will be held in the summer, Marcelino Iglesias, the party’s third-most senior official, told reporters today.

Zapatero pledged to fulfill his “responsibility as prime minister until the end of the term, until the last day.” He has already approached opposition parties to ensure the 2012 budget is passed. Most of the spending cuts are under way, he said.

Some argue his planned exit could give him greater freedom to pass tough measures without worrying about voter support.

‘More Difficult’

His decision not to run will put him “in a stronger position to take unpopular decisions and press ahead with the reforms,” said Gilles Moec, an economist at Deutsche Bank AG in London.

As it tries to steer the economy back to growth after an almost two-year recession, the government may need to make even deeper cuts amid signs its forecasts are too optimistic. The Bank of Spain says this year’s budget deficit will reach 6.2 percent of gross domestic product, compared with the government’s 6 percent forecast. The bank sees a 5.2 percent shortfall in 2012, versus the finance ministry’s 4.4 percent estimate.

“More measures will be needed for next year and beyond,” Ignis’s Thomson said. Zapatero’s exit ultimately means it “becomes more difficult to pass unpopular measures,” he said.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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