Rajoy Raid on Reserves for Pensions Highlights Poll Needs

Rajoy Raids Reserve Fund for 1st Time to Pay for Higher Pensions
Spanish Prime Minister Mariano Rajoy will raid for the first time the pension reserve fund to pay for a increase in retirement payments. Photographer: Angel Navarrete/Bloomberg

Spanish Prime Minister Mariano Rajoy’s unprecedented raid on a decade-old pension reserve fund to finance increased benefits comes less than a month before before regional elections as his popularity slumps.

As the Cabinet approved a 2013 austerity budget demanded by the European Union, Rajoy’s ministers also agreed to use 3 billion euros ($3.9 billion) from the 67 billion-euro reserve for the first time. It approved a 1 percent rise in pensions for 2013, the same as in 2012, and said retirees may also be compensated for inflation above that rate.

“Politically, they couldn’t do anything else,” Jose Ramon Pin, professor of public administration at IESE business school, said in a telephone interview. “The big problem is the message it sends outside Spain.”

Rajoy, in power since December, faces regional elections in Galicia and the Basque Country on Oct. 21, and in Catalonia on Nov. 25.

Galicia, his home region and traditional stronghold of his People’s Party, has the second-oldest population in Spain as over-65s make up more than a fifth of the population, data from the National Statistics Institute show.

Poll Slump

In Catalonia, which accounts for a fifth of the economy, regional President Artur Mas is calling for increased control over tax revenue and greater autonomy. The ruling PP’s share of the national vote fell to 36.6 percent in July from 42.7 percent in January, a poll by state-run CIS showed on Aug. 6. Eighty-four percent of voters have little or no confidence in Rajoy, a poll in El Pais showed on Sept. 9.

The pension reserve invests mostly in Spanish government bonds and accounts for about 10 percent of the central government’s outstanding debt. The cache that has been built up since 2000 to safeguard pensions as the population ages is being raided as the 25 percent jobless rate undermines the welfare system’s revenue.

Spanish bonds fell as the 10-year yield increased to 5.98 percent at 10:50 a.m. from 5.95 percent yesterday. Yields are still 43 basis points lower than before European Central Bank President Mario Draghi offered to buy the bonds of struggling nations as long as they agree to strict conditions as part of a rescue package funded by euro-region governments. Rajoy has spent two months saying he’ll consider a bailout.

Adding Pressure

“It adds pressure for Spain to ask for the bailout since it means less support for Spanish debt,” said Virginia Oregui, the San Sebastian-based managing director at Geroa EPSV Fondos, which manages 1.1 billion euros, including Spanish government bonds.

Budget Minister Cristobal Montoro said the law requiring pensioners be compensated if inflation rises by more than their benefits remains in place. He stopped short of saying the government wouldn’t change it when asked by reporters. Pensions rose 1 percent this year, meaning that if the November inflation rate exceeds that, the government will make up the difference. Inflation accelerated to 3.5 percent this month, as a sales-tax increase came into effect.

“The reserve fund is there to be used,” Montoro said. “Politically, it’s very important” to maintain pensioners’ purchasing power.

The PP government boosted pensions at its second cabinet meeting after coming to power in December even as it broke other election pledges on tax and benefits. Amid the highest jobless rate in the European Union, 1.7 million homes have no breadwinner, and the government says pensions represent the only income for many families.

Boosting Incomes

“We are guaranteeing the incomes of almost 10 million people who receive those pensions,” Montoro said.

Pensions will account for 122 billion euros in 2013, as more than 60 percent of the budget will go to social expenditure. The budget, which aims to reduce the deficit to 4.5 percent of gross domestic product from 6.3 percent this year, freezes public workers’ wages and increases taxes including a new levy on lottery winnings.

“You should never put your hand in the pension pot,” Manuel Pizarro, a former PP lawmaker and Endesa SA chairman who now heads Baker McKenzie in Spain, said in an interview with Onda Cero radio today. “It’s the last thing I’d touch.”

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