Prime Minister Mariano Rajoy said Spain’s future is at stake 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.

 

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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. Photographer: Angel Navarrete/Bloomberg

 

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Spanish Prime Minister Mariano Rajoy. Photographer: Alessia Pierdomenico/Bloomberg

“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 Madrid, 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.

Bailout Level

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. Euro-region finance ministers on March 12 settled on narrowing the shortfall to 5.3 percent of gross domestic product from 8.5 percent last year, even as the nation battles its second recession since 2009.

“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 10-year bond yield rose to 5.98 percent yesterday, the most since December. That compares with the 7 percent level that pushed Greece, Ireland and Portugal to seek bailouts. The extra yield investors charge Spain to borrow for 10 years compared with Germany widened to 433 basis points, compared with about 15 basis points in the first decade of monetary union.

Doing ‘Homework’

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 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.

European Central Bank Governing Council member Ewald Nowotny concurred.

“The Spanish government is taking the necessary steps, which will contribute to help calm the markets,” Nowotny told reporters in Vienna late yesterday.

Regional Politics

Spain’s efforts to bring the budget deficit under control depend in part on the regions. The PP controls 11 of the 17 states, which were created as part of Spain’s return to democracy in 1978.

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.

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. That pushed the national shortfall to 8.5 percent, instead of the 6 percent goal. 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.

To contact the reporter on this story: Emma Ross-Thomas in Madrid aterossthomas@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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