Prime Minister Mariano Rajoy said Spain’s future is on the line in its battle to tame surging bond yields, as the head of the nation’s second-largest region proposed handing back powers to the government to cut costs.
With Spanish bonds trading closer to levels that prompted Greece, Ireland and Portugal to seek European bailouts, Rajoy will address lawmakers of his People’s Party today to explain the deepest budget cuts in three decades. The prime minister will speak at 1 p.m. in Madrid.
“Without a doubt, a good part of Spain’s future is at stake,” Rajoy told senators yesterday, as he urged regional governments to contribute to spending cuts. “The problem is that the markets can lend or decide not to lend.”
Rajoy has stepped up his rhetoric in the past week as he seeks to persuade Spaniards to accept spending reductions and tax increases as a less painful alternative to a bailout. His three-month-old government is struggling to convince investors it can reduce the deficit by a third this year and crack down on overspending by regional administrations.
As Spain’s regions suffer from a slump in tax revenue while most are locked out of capital markets, Esperanza Aguirre, the president of the Madrid region, yesterday proposed handing back responsibilities such as health and education to the central government. Aguirre, once a potential rival to Rajoy for the PP leadership, said the move would save 48 billion euros ($63 billion) by avoiding overlap.
The 10-year bond yield rose as high as 6.02 percent today, the most since December, before easing to 5.84 percent as of 11:50 a.m. in Madrid. That compares with the 7 percent level that pushed Greece, Ireland and Portugal to seek bailouts.
Yields fell after European Central Bank Executive Board member Benoit Coeure signalled the bank could revive its program of sovereign bond purchases for Spain. He praised the Spanish government for taking “very strong deficit measures.”
“Will the ECB intervene? We have an instrument, the securities markets program, which hasn’t been used recently but it still exists,” he said in a speech in Paris today.
Spain’s 10-year borrowing costs have jumped more than one percentage point since March 2, when Rajoy said that Spain would miss a deficit goal approved by the European Union. Euro-region finance ministers on March 12 settled on a new target of 5.3 percent of gross domestic product, compared with 8.5 percent last year.
“The idea that Spain is going to be able to avoid a bailout is going to be tested over the next few months,” said Harvinder Sian, a senior interest rate strategist at Royal Bank of Scotland Group Plc in London. “We think the market will smash back to the highest levels we’ve seen and go beyond that.”
The government is trying to implement the deepest austerity steps in at least three decades even as the economy suffers its second recession since 2009. Spanish industrial production fell 5.1 percent in February from a year earlier, the most in three months, data showed today.
While the cuts are “greater than would have been desirable during a recession,” they are the “shortest route to return to economic recovery and job-creation,” Budget Minister Cristobal Montoro told Parliament today.
Markets aren’t being “reasonable” to demand additional increases to the euro region’s firewall as Spain and Italy are doing their “homework,” Michael Fuchs, an economic-affairs spokesman for German Chancellor Angela Merkel’s Christian Democratic Union and a member of the party’s executive board, said in an interview yesterday.
“Why should we worry about Spain now? I don’t think there’s anything that’s going to be a difficulty at the moment,” he said.
Investors need “time for analysis” to weigh up the measures Spain has taken, Deputy Economy Minister Fernando Jimenez Latorre said at a conference in Madrid today. Those measures include changes to labor-market rules that make it easier to cut wages and fire staff in an attempt to reduce the 23.6 percent jobless rate, the highest in the EU.
Spain’s efforts to bring the budget deficit under control depend in part on the regions. Montoro said the government would start publishing quarterly figures on individual states’ revenue and expenditure in terms that are comparable with national accounts.
The PP controls 11 of the 17 states, which were created as part of Spain’s return to democracy in 1978 and are enshrined in the constitution. While Madrid is controlled by the PP, the biggest region, Catalonia, is run by Convergencia i Union, a nationalist group that wants more autonomy from Spain. Andalusia, the third-biggest region, will probably stay under Socialist control after the PP failed to win a majority in an election on March 25. In response to a question in the Senate yesterday about Aguirre’s proposal, Rajoy said a debate about the regional structure “isn’t even being considered.”
Regions control health and education and their failure to cut spending pushed all the states apart from Madrid to miss their deficit target last year, according to government data. The states expanded spending during Spain’s decade-long real estate boom amid a surge in tax revenue linked to property sales, which dried up when the market collapsed in 2008.