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Rajoy Has Little Time to Savor Victory as Debt Crisis Flares

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People's Party Leader Mariano Rajoy
Mariano Rajoy, leader of the conservative People's Party. Photographer: Denis Doyle/Bloomberg

Nov. 21 (Bloomberg) -- Mariano Rajoy, who has become Spain’s prime minister after an eight-year wait, will have to act quickly as borrowing costs approach euro-era records and the country risks becoming the next victim of the region’s debt crisis.

Spain’s 10-year bond yield rose to 6.566 percent at 10:02 a.m. in Madrid from 6.379 percent on Nov. 18 after the People’s Party yesterday beat the ruling Socialists and their candidate Alfredo Perez Rubalcaba in a landslide, winning 186 seats in the 350 seat Parliament. The gap between Spanish and German borrowing costs widened to 465 basis points and the Ibex 35 stock index fell 1.9 percent.

“Just as markets weren’t particularly heartened by the arrival last week of Mr. Monti on Italy’s political scene, it is unlikely there’ll be a Rajoy relief rally,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “Investors are primarily concerned with the credibility of plans to shore up euro-zone sovereign debt.”

Twice Defeated

Rajoy, who was twice defeated in elections by Prime Minister Jose Luis Rodriguez Zapatero, handed the Socialists their worst defeat since Spain’s return to democracy in 1978. Rajoy’s PP won the biggest parliamentary majority of any government in almost 30 years. A 30-year veteran of the People’s Party, Rajoy owes much of his success in the election to the failure of his adversaries and has given few specifics on how he plans to slash the deficit and contain the debt.

“Time is running out and by the time a new government comes in, it will have run out,” said Fernando Eguidazu, president of the economic policy committee of the pro-entrepreneur lobby Circulo de Empresarios. “The new government will have to implement measures extremely quickly because the markets will not give us any grace period.”

At 56 years old, Rajoy is Spain’s oldest leader to come to power since the death of dictator General Francisco Franco in 1975. Spain’s deepest economic crisis in six decades eroded support for the Socialists and they leave the scene with the country’s 10-year bond yield near the 7 percent level that led Greece, Ireland and Portugal to seek bailouts. It rose as high as 6.78 percent on Nov. 17, back at the levels Spain was paying before it joined the euro.

‘Badly Managed’

Rajoy and the PP won 10.8 million votes, compared with the 10.3 million they won in 2008. The margin of their victory was due to the hemorrhaging of the vote for the Socialists, which plunged by about 4.5 million votes, or almost 40 percent.

Rajoy’s victory has “a lot to do with the anger of the electorate against the Socialist party and Rubalcaba as a member of it,” said Pablo Onate, general secretary of the Spanish Political Science Association in Madrid in an interview after the election.

As leader of the PP, Rajoy has shown perseverance and determination in holding his party together after his bitter election defeat against Zapatero in 2004 and a revolt against his leadership after a second loss in 2008. Three days before the 2004 election, with Rajoy leading in the polls, a terrorist attack on commuter trains in Madrid’s Atocha train station killed 192 people, and provoked a backlash against the ruling PP.

Madrid Bombing

Outgoing Prime Minister Jose Maria Aznar’s government initially blamed Basque terror group ETA, even after an al-Qaeda linked group claimed responsibility. Aznar’s administration had supported the U.S.-led war in Iraq, which polls at the time showed 90 percent of the population opposed.

After his second defeat, in 2008, Rajoy successfully defended his leadership when a faction of his party, led by the president of Spain’s second-richest region, Esperanza Aguirre in Madrid, publicly criticized his campaign.

“Those were particularly bitter moments, during which I doubted whether I should remain the party’s leader or leave politics altogether,” Rajoy wrote about the event in his autobiography, published in September.

Under Rajoy’s leadership the PP toned down its rhetoric on social issues such as abortion and gay marriage and played down the party’s traditional links to the Catholic Church in an effort to broaden its appeal to Spain’s increasingly secular voters. While Rajoy opposed Zapatero’s legalization of gay marriage, his program didn’t propose any reversal of the law and during the campaign he said he wasn’t interested in divisive issues.

‘Prudent Men’

“He has the courage of prudent men,” Juan Carlos Aparicio, a former minister who served in the same cabinet as Rajoy under Aznar between 2000 and 2002, said in an interview. “He is reasonable and sensible.”

Rajoy worked his way up through the party ranks, serving as education minister in Aznar’s first government and interior minister and deputy prime minister during Aznar’s second term, when Spain qualified to join the euro. The PP government virtually eliminated a budget deficit of 7 percent of gross domestic product, helping to reduce the gap between Spanish and German borrowing costs from 300 basis points to seven.

He first joined Alianza Popular under Manuel Fraga, the former minister of Franco who founded the precursor to the People’s Party. Rajoy left his home in the northern Spanish province of Galicia, where he started out as a registrar general, when he was called to Madrid by Aznar. He married in 1996 and has two boys.

In his autobiography, the son of a judge and a home-maker mother describes an uneventful childhood in a typical Spanish family. The weekly highlight was to enjoy drinks and tapas with neighbors at the local bar before digging into his mother’s “cocido,” a Galician stew of meat and chickpeas.

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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