Spanish Bonds Fall Even as Rajoy Unveils More Budget Cuts

Spain’s efforts to calm investors with 10 billion euros ($13 billion) of budget cuts in education and health failed to stem concerns the nation may be the fourth euro member to need a bailout.

The yield on Spain’s 10-year benchmark bond surged 20 basis points to 5.95 percent today as Economy Minister Luis de Guindos declined to rule out a rescue for Spain and Bank of Spain Governor Miguel Angel Fernandez Ordonez said the nation’s lenders may need additional capital if the economy weakens more than expected.

Prime Minister Mariano Rajoy yesterday unexpectedly announced the 10 billion-euro package, less than two weeks after unveiling the most austere budget in more than three decades. Rajoy is targeting basic public services for the first time since his election in December in a bid to convince investors he can bring order to the nation’s finances.

“There are growing fears that the Spanish economy is caught in a pernicious circle,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e-mailed response to questions. “The weakness of government finances, the fragility of banks and worries about the scale of the recession all feed on each other.”

Yields Jump

Spain’s 10-year borrowing costs have jumped more than one percentage point since March 2, when Rajoy announced that Spain will miss its 2012 budget-deficit goal approved by the European Union. Spain overshot last year’s target and the nation is battling its second recession since 2009.

Euro-region finance ministers on March 12 settled on a shortfall goal of 5.3 percent of gross domestic product for Spain in 2012, leaving it unchanged at 3 percent for 2013.

The 10 billion euros of savings announced yesterday will be implemented by the regional administrations, with the central government strengthening the legal framework to allow local authorities to make more cuts, two government officials, who declined to be named, told reporters today. Regional health chiefs will meet on April 18 to discuss measures, they said, without giving details of where savings will be made.

As regional governments struggle to rein in their deficits, Esperanza Aguirre, the president of Madrid, said regions should hand back responsibilities such as health and education. Giving up powers to the central government and passing other duties on to town halls could save 48 billion euros by reducing overlap, Aguirre, a member of Rajoy’s People’s Party, told reporters after meeting with the premier today.

Rajoy will spell out his planned reforms at a meeting of PP lawmakers tomorrow, an official in the government’s communications department, who asked not to be named in line with its policy, said in a phone interview yesterday.

‘Ambitious’ Reforms

The country is working on “ambitious” health reforms and has to put regional finances “in order,” Budget Minister Cristobal Montoro said in an interview on RNE radio today. He also said that increasing the value-added tax would be a “deep error” that would extend the recession and hurt consumption.

Spain doesn’t plan to seek aid for its banks from European rescue funds as European Central Bank lending has provided them with a “very considerable liquidity cushion,” Montoro said.

The ECB has lent banks in the euro region more than 1 trillion euros for three years since December, propping up demand for sovereign bonds. The ECB should be more aggressive by buying more public and private debt, Alfredo Saenz, chief executive officer of Banco Santander SA, said in Madrid today, calling for “stronger European quantitative easing.”

“As a result of Spain’s challenges, sentiment towards its sovereign bonds is now the bellwether for Europe’s debt crisis,” Mansoor Mohi-uddin, chief currency strategist at UBS AG, wrote in an e-mailed note on April 7. “If investor appetite wanes, then currency markets will start to price in either ECB rate cuts to help restore sentiment, or Madrid requires external assistance from its European Union partners.”

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