Zapatero’s Socialists Routed in Spanish Backlash Over Austerity Measures

Spanish Prime Minister Jose Luis Rodriguez Zapatero’s Socialist party had its worst electoral setback in more than 30 years, prompting a shift in regional power that risks swelling the public deficit.

Spanish bonds fell after results showed the opposition People’s Party won 38 percent of the vote in municipal elections yesterday, compared with 28 percent for the ruling Socialists. The Socialists lost control of Barcelona for the first time since 1979 and ceded Seville, leaving the party in opposition in the nation’s four biggest cities. The central region of Castilla-La Mancha, held by the Socialists for three decades, fell to the PP, as did the Balearic Islands.

The transfer of power in the regions may spark doubts over Spain’s ability to contain its budget deficit. Spanish bonds declined amid concern newly elected officials may reveal weaker finances than their predecessors reported. The defeat, capping a week of street protests, may further weaken Zapatero as he cuts the euro-region’s third-largest shortfall to avoid following Greece, Portugal and Ireland in needing a bailout.

“The government is really in a Catch-22 situation,” Fernando Fernandez, a professor at IE business school in Madrid and a former IMF economist, said in an interview on Bloomberg Television’s “The Pulse” today. “There’s nothing it can do to win more political support without really hurting its image in the markets and creating significant damage to the economy.”

Spanish bonds fell after the results, pushing the extra yield over comparable German debt to as much as 261 basis points, the most in four months, from 243 basis points on May 20. That compares with a euro-era record of 298 basis points reached in November.

Catalan Example

After elections in Catalonia last year, the new government said the deficit would be 60 percent wider than previously forecast, undermining confidence in regions that together have 115 billion euros ($163 billion) of debt.

“They’re going to arrive and realize there’s no money,” said Ismael Crespo, a political scientist at the Ortega-Maranon Foundation in Madrid. “Many of the regions have problems not only to meet the deficit target, but to meet basic services, which until now have been hidden because of the elections.”

Maria Dolores de Cospedal, elected last night as president of Castilla-La Mancha, has pledged an “audit” of the region, which she said is “practically bankrupt.” Its deficit was 6.5 percent of output last year, the highest in Spain, compared with a target for all the regions of 2.4 percent that narrows to 1.3 percent for 2011.

More Measures?

“We would expect some fiscal slippage for 2011 by the regions and municipalities,” said Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London. “Some regions and municipalities may choose to put forward additional fiscal measures while others may present revised, i.e. more realistic, fiscal-deficit targets.”

Spain’s 8,000 municipal governments, which are also suffering from a revenue slump caused by the collapse of property prices, owe 33 billion euros in unpaid bills, according to the Platform Against Late Payment, a pressure group.

Zapatero, who leads a minority government, has said he won’t seek a third term in general elections next year and his party said today that the process of primary elections to choose a successor will start on May 28.

Last night, Zapatero said he aimed to govern until March even as the PP called for early elections. Extremadura’s Socialist President Guillermo Fernandez Vara -- who may be able to remain in power in a coalition with the United Left party -- said Zapatero should consider an early vote, newswire Efe cited him as saying.

“He has no interest in calling elections right now because he will get crushed,” said Antonio Barroso, an analyst at Eurasia Group. “He needs time to show the reforms are working and the economy is recovering to give his party a chance.”

Mounting Unemployment

Newly elected officials may also seek to address some of the demands of the protests against cuts, bank bailouts and an unemployment rate of 21 percent. Defense Minister Carme Chacon, cited in polls along with Deputy Prime Minister Alfredo Perez Rubalcaba as a candidate to succeed Zapatero, said on May 18 that some of their proposals were “reasonable.”

Young demonstrators pitched tents on May 15 in Madrid’s Puerta del Sol and have been there ever since. They are calling for changes to the electoral system to reduce the dominance of the two main parties and stop politicians facing corruption charges from running for office.

The protests, which have spread to other Spanish cities and have been supported by people of all ages, call for voters to be able to choose lawmakers directly rather than for party lists. The movement said yesterday it will continue demonstrating “at least” through May 29.

Twitter Protests

The emergence of the makeshift camp in Sol was spurred by the use of Twitter, mirroring tactics that were employed in protests in Tunisia and Egypt. The camp, powered by generators, a solar panel and open Wi-Fi, is divided into areas that include a medical tent, a children’s area and a legal department.

“No work, no house, no future, no fear,” reads one of the posters at the square, one of Madrid’s most famous landmarks.

The Socialist government has angered voters with the deepest budget cuts in three decades and measures to help banks, while 45 percent of young people are out of work. Turning its back on traditional allies in its efforts to stem contagion from the sovereign-debt crisis, the government has pared wages, axed benefits and revamped labor and pension rules.

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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