Salgado Cuts Deficit, Overcomes Spanish Chauvinism

Spain's Finance Minister Elena Salgado
Spain's Finance Minister Elena Salgado is pushing through the toughest austerity measures since Spain returned to democracy in 1978 after the death of General Francisco Franco. Photographer: Denis Doyle/Bloomberg

As the only woman in her university class in Franco’s Spain, Elena Salgado remembers being singled out by a professor who doubted she could keep up with the male students. After making a point to the class, her professor would turn to her and ask: “And you, do you also understand?”

Forty years on, Spain’s finance minister is now trying to prove that she understands how to fix the country’s budget.

“They had a bit of a reputation for being over-optimistic and that’s gradually shifting,” said Michael Dicks, head of research at Barclays Wealth in London, which oversees about $240 billion of assets including Spanish debt. “People are more prone now to believe what’s in print and feel there’s more cohesion and drive to do whatever’s necessary.”

Salgado, 61, is pushing through the toughest austerity measures since Spain returned to democracy in 1978 after the death of General Francisco Franco. She has jettisoned key policies of the governing Socialist Party after Greece’s debt crisis swept through the euro region earlier this year, helping to reduce the premium that investors demand to hold Spanish debt. The risk now is that the cuts will worsen a slump that’s pushed unemployment to the highest in the European Union.

“This is no time for short-cuts or expecting miracles,” Salgado told lawmakers as she presented the 2011 budget to Parliament on Oct. 19. “Reducing the deficit has become an urgent goal.”

Yield Premium

The extra yield on Spanish 10-year bonds over German bunds has declined 60 basis points since touching a euro-era closing high of 221 basis points in June. Spain’s central-government budget deficit narrowed 42 percent in the first nine months of 2010 from a year earlier, the Finance Ministry reported yesterday.

Salgado, whose interests range from yoga to the music of Bruce Springsteen and Albert Camus’s existentialist novels, has had to face doubts about her ability ever since Prime Minister Jose Luis Rodriguez Zapatero made her finance minister in April 2009. Alvaro Nadal, a lawmaker from the opposition People’s Party, said Oct. 14 she lacks the “intellectual background” for the job even though she went on to study economics after her engineering degree.

People’s Party lawmaker Cristobal Montoro last year accused her of parroting what her advisers told her and said she could “learn economics’’ from parliament’s economics committee.

Groucho Marx

Salgado replied with a quote from Groucho Marx that wrapped up the meeting: “I’ve had a perfectly wonderful evening, but this wasn’t it.” The room burst into laughter.

“She’s famous, and rightly so, for being very strong,” said Carmen Alborch, a senator who as culture minister appointed Salgado to run Madrid’s Teatro Real opera house in 1996. “She’s pure steel.”

Investors have given Salgado’s measures, which include a public wage cut and pension freeze, a favorable response. As the spreads on Irish and Portuguese bonds surged to euro-era highs last month in a renewed attack on the region’s most indebted nations, the yield on Spain’s 10-year bond rose just 7 basis points in the month. The spread on its debt is less than half the premiums on Portuguese and Irish bonds, which stand at 339 basis points and 426 basis points, respectively.

Salgado, who has been criticized for over-optimistic economic forecasts, has also seen the International Monetary Fund raise its 2010 estimates to match hers. While the IMF’s 2011 prediction of 0.7 percent growth lags behind the government’s 1.3 percent forecast, Salgado says the Washington- based lender will eventually fall in line with her again.

‘Inspiring Confidence’

“In the market she ends up inspiring confidence and manages to give a sense that you can rely on the government’s determination,” said Marco Annunziata, chief economist at Unicredit Bank in London, who has attended investor meetings with Salgado. “That’s helped investors differentiate Spain more and more from the weaker peripheral countries.”

Salgado, the only surviving member of Zapatero’s first cabinet in 2004, nevertheless still needs to repair an economy battered by a property collapse and the doubling of joblessness. The spread over German government debt is still 10 times the average in the first decade of European monetary union. Spain’s autonomous regions also face a funding crisis that has shut Catalonia, the wealthiest, out of public debt markets since March.

Job Losses

Spain’s budget deficit is forecast to be 9.3 percent of GDP this year, the second-largest in the euro region. Unemployment has surged to 20.5 percent as the construction industry’s collapse meant that more than half the job losses in the euro region since January 2008 happened in Spain.

Salgado has to find a way to make an economy that averaged annual growth of 3.5 percent in the first decade of euro membership create jobs just as households work off the debt taken on during the boom.

“The underlying economic problems have not disappeared, further progress is necessary and we still see big challenges going forward,” said Kommer van Trigt, a portfolio manager at Robeco Group in Rotterdam.

Born in the northwestern town of Orense, she studied engineering at the Polytechnic University of Madrid until 1972 before taking economics at Complutense University.

She served in the government of former Prime Minister Felipe Gonzalez as director of personnel costs and pensions from 1985 to 1991 and secretary general of communications from 1991 to 1996. Salgado, who speaks English and French, was then appointed director of Madrid’s Teatro Real opera house, where she hired Frenchman Stephane Lissner, who now heads Milan’s Teatro alla Scala, as artistic director.

Catholic Fight

“The temptation is to hire people from around here, but she had the ambition to find the best and she approached the stars of the opera world,” said Miguel Muniz, the opera house’s current director general, who worked with Salgado in the finance ministry. “She had a great ambition to modernize.”

Divorced with a 34-year-old daughter, Salgado introduced a smoking ban and took on the Catholic Church with a new artificial fertilization law when she was health minister from 2004 to 2007. She was shortlisted to head the World Health Organization in 2006, and Zapatero made her minister of public administration in 2007.

Salgado, who cites Camus’s “The Outsider” as her favorite book, climbed Mount Kilimanjaro in 2000 and now practices Bikram Yoga, which involves holding contorted postures in 40 degree Celsius heat (104 degrees Fahrenheit.) A fan of Wagner’s opera Tristan and Isolde, Salgado still manages to squeeze in trips to most of the Teatro Real’s productions, Muniz said.

Future Plans

Already second deputy prime minister as well as finance chief, she has no plans to climb further, she told El Pais newspaper in December. That’s giving her a year and a half to get the economy on an even keel before the next elections are due.

“If anyone thought she was coming to obey Zapatero’s orders, I think sincerely that’s not the case,” said Pedro Aspiazu, a lawmaker for the Basque Nationalist Party who negotiated the 2011 budget with Salgado. “She’s very tenacious, very tough and has clear ideas.”

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