Rajoy Pressured by Markets to Outline Spanish Deficit Cuts

Spanish Prime Minister-elect Mariano Rajoy faced mounting pressure to unveil his cabinet and plans for reducing the euro-area’s third-largest deficit as borrowing costs neared records after his landslide victory.

“The market is losing patience as no tangible plan is currently on the table,” said Fadi Zaher, a fixed-income strategist at Barclays Wealth in London. “Mr. Rajoy needs to find the balance between fiscal retrenchments and growth.”

Spain’s 10-year bond yield rose 20 basis points to 6.57 percent as of 3:45 p.m. in Madrid after the People’s Party yesterday ousted the ruling Socialists, winning the biggest parliamentary majority in a Spanish election in almost 30 years. The gap between Spanish and German borrowing costs widened 26 basis points to 467 and the Ibex 35 stock index fell 2.4 percent, the biggest decline in three weeks.

Rajoy and pro-business PP inherit a stalled economy with the euro area’s highest jobless rate and a deficit of more than twice the euro-region limit. In his acceptance speech, Rajoy warned Spaniards to brace for hard times, without giving any indications of who his new team would be or how he will slash the budget deficit by a third to 4.4 percent of gross domestic product.

‘Move Quickly’

“Rajoy needs to move quickly, focusing on the growth agenda but also putting in place the necessary budget measures to hit the existing medium-term fiscal targets,” said Riccardo Barbieri, London-based chief European economist at Mizuho International Plc. “While the ongoing selloff in the Spanish markets is part of a European trend, Spain has clearly underperformed in the past couple of weeks.”

Rajoy will lead a meeting of the party’s senior members at 5 p.m. today in Madrid, though it’s unclear whether the new team will be announced. Alvaro Nadal, the party’s economy secretary, said last night that he didn’t know who would be guiding economic policy in the new government.

“If you ask me how much the budget cuts are going to be next year I can’t tell you because we haven’t prepared a budget yet,” he said.

Miguel Arias Canete, head of the PP’s electoral committee and a former minister, said today that markets need to give the party time, as Spanish law makes it impossible for ministers to be appointed before Dec. 21.

Test of Confidence

“We are sending a message that we are going to do what needs to be done, but they need to give us space to do that,” the former minister said in an interview on Es Radio today.

Rajoy will face a test of market confidence tomorrow when the treasury sells as much as 3 billion euros ($4 billion) of three- and six-months bills. Spain had to offer 6.975 percent to borrow for 10 years at an auction on Nov. 17, the most since before the euro.

Rajoy pledged last night that Spain would “stop being a problem and become part of the solution again” in Europe, as he called for a “common effort.” “There won’t be miracles, we haven’t promised any,” Rajoy said.

The PP, which shepherded Spain into the single currency in 1999, campaigned on its economic record, which includes eliminating a 7 percent budget deficit in the eight years to 2004 and reducing the gap between Spanish and German borrowing costs from 300 basis points to seven. Unemployment fell to 11 percent from 18 percent as a construction boom fueled hiring.

Fighting for Euro

Now, seven years after the fall of the PP government that qualified Spain for the single currency, Rajoy will be fighting to remain in the euro. He inherits a deficit the European Commission says will be almost 7 percent of GDP and a banking system struggling to find funding and saddled by bad loans from the real-estate boom.

“Rajoy will have no option but to announce a package of extraordinarily tough reforms to convince the markets and his European partners Spain is different from Italy and Greece,” said Jose Antonio Sanahuja, a professor of international relations at Madrid’s Complutense University.

The landslide was due to a collapse in support for the Socialists, rather than a surge in backing for the PP. The PP won 10.8 million votes, compared with 10.3 million four years ago. Support for the Socialists plunged to almost 7 million votes, from 11.3 million in 2008. United Left, which includes Communists, won 11 seats, up from two, while Union Progress & Democracy, a party that wants to limit the power of the regions, took five seats, compared with one in the last election.

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