Aug. 24 (Bloomberg) -- Half an hour before a bond auction last month, Spanish Budget Minister Cristobal Montoro told lawmakers that the country was running out of cash. Now he’s blowing open divisions within Prime Minister Mariano Rajoy’s administration.
Montoro, 62, this week sparked a political storm after slamming a fellow minister for encroaching on his turf with plans to tax solar energy companies. The comments drew a riposte from his cabinet colleague, forced the deputy prime minister to intercede, and prompted El Pais, Spain’s most-read daily, to say that the country needs just one finance minister to set policy.
Rajoy is struggling to impose order on a government hamstrung by his decision to split the finance ministry in two after winning last year’s election and on internal squabbles over who runs the economy. That’s hindering his ability to turn around a country ravaged by the European Union’s highest unemployment rate and a failing banking system.
This week’s controversy “is a smoking gun,” said Luis Garicano, a professor of economics and strategy at the London School of Economics. “It brings into the open what’s been happening since the first day: there are two completely different views on policy.”
Rajoy’s predicament is worsening as he prepares to apply for a full bailout after already asking for a 100 billion-euro ($126 billion) rescue for the country’s banks. Montoro’s rejection of energy tax plans, which benefits solar companies advised by his brother’s lobbying firm, also risks pulling the government into a debate about its ties with big business.
Divisions in Rajoy’s government center on how fast to cut the deficit and how far to reform the economy. One wing, led by Montoro, is trying to take the sting out of the harshest budget cuts on record by assuring voters that much of the austerity is temporary in nature. The other faction, headed by Economy Minister Luis de Guindos, is more focused on executing the reforms.
At the heart of Montoro’s strategy is the assumption that Spain can ride out the economic crisis for the next couple of years and then return to the affluence it enjoyed during the boom years, according to Javier Diaz-Gimenez, a professor of economics at IESE business school in Madrid.
“The guy thinks that this is a temporary problem and that things will take care of themselves, and he’s wrong,” Diaz-Gimenez said. “There is no serious reform plan and there is no political will do to reforms.”
In December, Montoro raised income taxes, presenting it as a temporary measure that the government aimed to reverse in two years. He also removed bonus payments from public workers, promising those payments would also be reinstated.
Montoro has also irked investors. On July 19, he told the Spanish parliament that “there’s no money in the public coffers” just minutes before the country tried to sell 3 billion euros in bonds ranging from two to seven years in maturity.
The country’s borrowing costs surged as investors ducked out of the auction, with two-year notes yielding 5.204 percent compared with 4.335 percent the previous month.
At the same time, Montoro has deflected the political fire from Rajoy as the public face of Spain’s austerity program. In July, he turned up to defend Rajoy’s latest package of cuts in parliament when the premier chose to stay away and tackled the party’s regional leaders, who wield much of the political capital in Spain’s decentralized system.
The regions were responsible for more than two-thirds of Spain’s overspending last year, pushing the deficit to 8.9 percent of gross domestic product.
Montoro can’t be blamed for how the government is set up, says Diaz-Gimenez. When Rajoy came to power he split the finance ministry and decided not to give the title of deputy premier for economy to either Montoro or De Guindos.
“It’s Rajoy really,” said Diaz-Gimenez. “It’s about the design of the government. The fact that there is no deputy prime minister in charge of the economy says he thinks the economy is not a priority and we are going to play politics and squabble.”
The divisions at the heart of Rajoy’s government have hobbled Spain’s ability to operate on a European level.
While De Guindos, who represents the government at European meetings, inspires confidence in the bloc’s other finance ministers, they question his ability to deliver on his promises because he is often contradicted by Montoro, according to an official who takes part in finance ministers’ meetings.
In January, De Guindos’s efforts to persuade investors and officials that Spain was fixed on its budget targets was undermined by Montoro’s calls for more flexibility on the pace of deficit reduction.
That disagreement was the prelude to Rajoy’s surprise announcement on March 2 that Spain was easing its deficit objectives. The decision wrong-footed other euro area members who hadn’t been consulted and helped establish Rajoy’s reputation for clumsiness among European leaders, according to an official involved in running EU summits.
On March 12, De Guindos turned up at a finance ministers’ meeting saying he had no mandate to negotiate the budget cuts demanded by them because Montoro had decided to delay his budget, according to a different official who was present. He then spent an hour on the phone to Madrid before he was given permission to agree on a new target.
Montoro has so far shown little sign of changing tack even as the government’s position worsens. In his Aug. 16 interview with Bloomberg, Montoro slapped down Industry Minister Jose Manuel Soria’s plans to impose taxes on solar power producers to claw back subsidies.
“Until I decide, this isn’t going forward, whoever announces it,” Montoro said.
He also rejects any suggestion that his interference in energy policy represents a conflict of interest, saying that discussions on Soria’s tax policies have been informal.
El Pais said Aug 23 that he needs to clear up doubts about his ties to the firms. A day earlier, Eduardo Madina, general secretary of the Socialists in parliament, demanded that Montoro testify before parliament to explain the government’s energy policy.
As ministers bicker, Spain is moving closer to joining Greece, Ireland, Cyprus and Portugal in requesting a full sovereign rescue. De Guindos told Spanish news agency Efe in an interview on Aug. 18 that terms for bond-market assistance will be discussed in September.
“There’s something of a credibility gap starting to appear,” said Johan Jooste, a portfolio strategist who helps manage $1.8 trillion in client money at Merrill Lynch Wealth Management and doesn’t own Spanish government debt. “There have been a series of missteps.”
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