Rajoy Struggles as PP Tainted in Spain Woes: Euro Credit

Spanish Prime Minister Mariano Rajoy
Mariano Rajoy, Spain's prime minister. Photographer: Mario Proenca/Bloomberg

Prime Minister Mariano Rajoy’s credibility is being undermined by the role of his People’s Party in the failure of the Bankia group, Spain’s third-biggest lender, and the emergence of more unpaid government bills.

PP-run regional governments in Madrid and Valencia orchestrated the 2010 merger of seven saving banks to form Bankia, which was nationalized on May 9. The same regions under Rajoy’s party control were mostly responsible for the revision of Spain’s 2011 budget deficit to 8.9 percent of gross domestic product from an earlier estimated 8.5 percent.

Spain’s takeover of Bankia underscored investor concerns about the health of the country’s banking system and the government’s ability to support it after Rajoy said the hole in public finances was bigger than previously thought. Investors charge about 963 basis points more to own Bankia bonds maturing in 2017 than German bunds of similar maturity.

“All this does create a problem in terms of credibility for the Rajoy government,” said David Rueda, a professor of comparative politics at Oxford University in Oxford, England. “It makes it more difficult for them to convince the public of their policies and also the justice of carrying them out if they are seen to be partly to blame.”

The yield on 10-year Spanish government debt exceeds the rate of German bonds of similar maturity by about 485 basis points. The European Central Bank should act to bring down borrowing costs because if public debt isn’t sustainable, “we have a problem,” Rajoy said earlier today after a meeting of European leaders in Brussels.

Election Victory

The PP won the national election in November by pledging to create jobs and fix public finances. Rajoy said the Socialists overspent during an economic boom that ended with the bursting of the real estate market and the highest unemployment rate in the European Union at 24 percent.

Since December, Rajoy has blamed unpopular measures such as raising taxes and cutting health-care benefits on the need to plug the hole left by his Socialist predecessor Jose Luis Rodriguez Zapatero.

Rajoy’s complaints are getting harder to justify as the PP’s role in Spain becomes clearer, Jesus Castillo, an economist at Natixis in Paris, said in a phone interview.

“It’s a hollow excuse, and it’s less and less credible,” he said. “No one is fooled.”

Spain revised its 2011 budget deficit on May 18 after accounting for the unpaid bills of regional governments, including those of PP-run Madrid, the nation’s second-biggest economy, and Valencia.

Deficit Woes

Economy Minister Luis de Guindos has conceded that the deficit slippage has hurt the government. De Guindos previously served as a deputy to Rodrigo Rato, a former economy minister in the PP government of Jose Maria Aznar who went on to lead the merger of savings banks in regions controlled by the party that formed Bankia.

“Last year the deficit finished up at 8.9 percent instead of the 6 percent that was committed to,” de Guindos told Parliament on May 22. “This has had a negative effect on the credibility of our accounts, not just because of the size of the slippage but also because of the incapacity to identify it beforehand,” he said.

De Guindos appeared before Parliament’s economics committee late yesterday after a request from opposition parties to explain what the government plans to do with Bankia, how much public money will be used and who was responsible for the lender’s difficulties.

‘Singular Case’

Bankia is a “singular case” in Spain and the government will put in as much money as needed to clean it up, de Guindos said. The lender requires at least 9 billion euros ($11.3 billion) to cover its real estate losses. Decisions taken by the state on Bankia were the best way to “clear away the doubts about the solvency of the Spanish financial system,” he said.

He said the Bankia merger and sale of stock in the resulting bank last year was a mistake. Bankia’s market value has slumped 56 percent since shares were sold in July.

“Bankia is a paradigmatic case of those errors,” de Guindos told parliament last night, referring to Spain’s property boom years.

“Mr. de Guindos should not forget that the lenders with the most problems were effectively under the direction of his political party,” said Jose Camarasa, a former Socialist party spokesman on the Valencia regional assembly and currently a board member of Bancaja, the Valencia-based savings bank that was left with 38 percent of Bankia’s parent under the terms of the merger.

Caja Madrid

Madrid and Valencia were instrumental in the formation of what would become Bankia from the merger of Caja Madrid, Bancaja and five other savings banks. As well as the Bankia consortium, two other Valencia regional lenders, Caja de Ahorros del Mediterraneo SA and Banco de Valencia SA, a bank controlled by Bancaja, also have been taken over by the government.

“In English, they call such mergers a shotgun marriage and that’s exactly what happened,” Esperanza Aguirre, the PP’s head of the Madrid regional government, told its assembly on May 17, referring to the creation of Bankia.

She said its finance head, Antonio Beteta, endorsed the merger that formed Bankia on the recommendation of Zapatero’s government and the Bank of Spain. Beteta is today Rajoy’s secretary of state for public administration and in charge of imposing fiscal discipline on the 17 regional governments.

PP Leadership

“No one has hidden anything here, no one has lied and no one has made up anything,” Jose Manuel Vela, budget councilor for the Valencia regional government, said in comments about the region’s deficit slippage in an interview with Onda Cero radio yesterday. The slippage was down to “‘extraordinary circumstances,” including efforts to settle late payments to suppliers, he said.

As the debate rages in Spain over who is responsible for the country’s economic woes, Rajoy’s government insists that its plans to restore public finances and the banking system are on track.

De Guindos, who this year has ordered banks to take about 67 billion euros of charges for real estate on their books, said in a May 21 speech that existing provisioning rules on other types of loan are “sufficient.”

He also has appointed two auditors to evaluate the loan books of the banks in a bid to bolster investor confidence. His ministry has said the higher-than-previously reported 2011 deficit was due to one-time spending related to unpaid bills from previous years and wouldn’t affect this year’s shortfall goal of 5.3 percent of GDP.

Economic Tests

While senior PP figures such as Rato and Aguirre “owe taxpayers an explanation” for what has happened to banks and regional accounts, investors will judge Rajoy on whether he can restore the economy, said Javier Diaz-Gimenez, an economics professor at the University of Navarra’s IESE business school in Madrid.

“In the end, a government’s credibility is forward-looking,” he said. “It’ll depend on what happens to deficit data, the banks’ recapitalization and reforms this year. Facts are what count, and whether in the end, the economy starts to grow or not.”

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