Rajoy Seeks Free Hand on Cuts With Andalusia Vote: Euro Credit

Spain’s most populous region votes in two days in an election that may give Prime Minister Mariano Rajoy’s People’s Party free rein to enact his deficit-cutting policies.

Andalusia is the last state under Socialist control after the party was ousted in May from its traditional strongholds of Castilla-La Mancha and Extremadura. The region has obstructed efforts to curb the nation’s debt load, as its deficit was more than twice the target last year.

Rajoy, who has been in power since ousting the Socialists in December, said March 2 that the nation will miss its deficit goal for a second year. The yield on 10-year Spanish bonds has climbed 63 basis points since then, rising above Italy’s for the first time since August and ending yesterday at a two-month high of 5.5 percent.

“Andalusia is a region that has been in the Socialists’ power forever and winning there will be a strong sign the whole country now supports the government of the People’s Party,” said Antonio Fatas, an economics professor at the Paris-based INSEAD business school.

Rajoy, 56, has demanded that regions halve their total budget gap this year, even as the economy faces its second recession since 2009, to meet the nation’s European commitments. Regions control about 36 percent of public spending, including health and education, and accounted for most of Spain’s deficit slippage last year.

Default Insurance

The cost of insuring against a Spanish default for five years rose 12 basis points yesterday to 434, the highest level since January, according to prices from data provider CMA. That implies a 32 percent chance of Spain failing to meet its obligations within five years.

Spanish debt is rated A by Standard & Poor’s, five levels below Germany’s AAA grade.

Andalusia, with the highest unemployment rate in the country and the second-lowest output per capita, has been controlled by the Socialists since Spain’s return to democracy in 1978. Victory in Andalusia would leave Rajoy’s PP and its allies in control of all but two small regions and the Basque Country, which is run by a one-off coalition of the Socialists and PP.

This week’s polls by El Pais and ABC newspapers indicate the PP will win an outright majority on March 25, while a survey by El Mundo suggested it will fall short of a majority. The latter outcome may allow the Socialists to remain in power in coalition with the United Left party, El Mundo reported.

“A defeat of the PP at the Andalusia election could fuel fears that Spain will miss its deficit targets again this year,” said Georg Grodzki, who helps oversee $515 billion as global head of credit research at Legal & General Investment Management in London. “The jury is still out on the regions’ willingness to belatedly share the consolidation burden.”

Cooperation Needed

Rajoy needs their cooperation to reorganize public finances, which Moody’s Investors Service expects to include health-care cuts. Once the vote is over, Rajoy will be able to risk unpopular policies without electoral concerns. Asturias, the third-smallest state, also holds an election on March 25 and polls by ABC and La Razon indicate the PP may win enough votes to govern in a coalition.

“Rajoy has been presenting his measures gradually,” said Javier Del Rey Morato, a political-communications professor at Madrid’s Complutense University. “The markets would have preferred an immediate lump-package, but the premier has had an internal electoral front to heed.”

Rajoy, who will close the Andalusian campaign with a speech in Seville today, plans to present his 2012 budget on March 30, three months after coming to power. Investors remain “skeptical that the reforms brought underway by Rajoy will suffice,” Grodzki said.

Missing Targets

The regions, which spend more than a third of their budgets on healthcare and hire half of Spain’s public workers, need to reduce their overall shortfall to 1.5 percent of gross domestic product this year from 2.9 percent.

Spain’s total gap last year was 8.5 percent, overshooting the 6 percent target mainly because of slippage by the regions. Euro finance chiefs agreed March 12 to ease this year’s overall goal to 5.3 percent from an initial 4.4 percent. Rajoy wanted backing for a target of 5.8 percent.

Andalusia, Catalonia and Valencia are the three regions big enough to undermine Rajoy’s efforts.

Andalusia’s deficit was the second largest in absolute terms last year after Catalonia’s, even as it was about average as a proportion of GDP. After being shut out of public debt markets, Andalusia, like Catalonia, has resorted to selling so- called patriot bonds to retail investors, who can commit as little as 1,000 euros to each transaction.

Madrid Rates

Madrid, the second-biggest region, has the smallest budget deficit as a share of GDP. The state sold bonds on March 15 that yielded 200 basis points more than equivalent Spanish securities.

“Andalusia is a very important region that the PP can realistically take over to have absolute dominance of regional power in Spain,” Antonio Barroso, an analyst at Eurasia and a former government pollster, said in a telephone interview. A victory is “what Rajoy wants in order to transform the Spanish economy,” he said.

To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net

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

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