By Emma Ross-Thomas
Feb. 11 (Bloomberg) -- Spanish Prime Minister Jose Luis Rodriguez Zapatero?s moves to overhaul banks while changing rules on labor, pension and wages may do more to stem the debt crisis than European plans to reinforce its bailout fund.
Zapatero?s cabinet plans to pass new rules for job seekers today, two weeks after approving a draft bill to raise the pension age. By the end of the month it will pass a decree to bolster lenders? capital and in March aims to loosen collective- bargaining rules to make it easier for Spanish firms to compete.
Spain, emerging from almost two years of recession, is trying to convince investors it can shore up its struggling savings banks without overburdening state finances and having to follow Ireland in seeking a European Union bailout. The gap between Spanish and German borrowing costs is more than 10 times the average in the first decade of monetary union, even after easing by a third since Ireland?s rescue in November.
?The working assumption of more and more analysts in Europe is that Spain will be able to pull through on its own,? said Gilles Moec, co-chief economist at Deutsche Bank AG in London ?A lot of that has to do with what they?ve been doing; there?s a lot of market talk about Zapatero?s epiphany.?
Spain?s extra yield compared with Germany was 203 basis points yesterday from 201 on Feb. 9. That compares with a euro- era high of 298 basis points on Nov. 30 after Ireland sought EU help to reorder public finances crippled by the cost of rescuing its banks.
Union Card
Zapatero, a Socialist who said in 2005 he slept with his union card by his bed and pledged to keep increasing pensions, slashed public wages by 5 percent last year, froze pensions, reduced firing costs and made it easier for companies to opt out of wage-bargaining deals. After facing down the first general strike in eight years in September, he followed those measures with an increase to the retirement age even as the social security system remains in surplus.
The cabinet meets today to discuss policies to help Spain?s 4.6 million unemployed find jobs, as the National Statistics Institute publishes data that will probably show gross domestic product contracted for a second full year in 2010.
?Spain has done more impressive policy reforms in recent months than any other industrialized country I can recall,? Erik Nielsen, chief European economist at Goldman Sachs International, said in an e-mailed response to questions. There?s ?no question? Spain?s measures will do more to stem the sovereign-debt crisis than any steps by European leaders to retool the European Financial Stability Facility, he said.
EU Summit
Euro-area leaders are due to meet on March 11 for an extraordinary summit to consider ways to bolster their crisis- response mechanism after bailouts of Ireland and Greece failed to stop contagion, fueling concern Portugal and Spain might be next. A rescue of Spain, an economy almost twice the combined size of Greece, Portugal and Ireland, would push the 440 billion-euro EFSF to its limit.
Talks on making the EFSF more effective include finding ways to mobilize the full potential of the fund, now able to lend only about 250 billion euros due to collateral rules that underpin its AAA rating. Leaders are also considering ways to lower interest payments on the funds bailout loans and allow the EFSF to buy bonds of the region?s most-indebted countries. Signs of discord last week between EU leaders over how to bolster the fund undermined a rally in European bond markets and knocked the euro off a three-month high.
Budget Cuts
Spain?s 10-year bond yield rose 2 basis points yesterday to 5.33 percent. The cost of insuring Spanish sovereign debt increased as credit-default swaps rose 1 basis point to 236.5, according to CMA prices at 4:30 p.m. yesterday in London.
The deepest austerity measures in at least three decades reduced the euro region?s third-largest budget deficit to within the target of 9.3 percent of gross domestic product last year from 11 percent in 2009. The Spanish government, which faces a slump in support amid a backlash against the budget cuts and a 20 percent unemployment rate, has pledged to meet a 6 percent deficit goal this year.
The Bank of Spain, which has repeatedly urged greater austerity and legislative overhauls, expressed confidence in the government?s policies on Feb. 8 as Chief Economist Jose Luis Malo de Molina said it was ?more than reasonable? to think this year?s budget goal will be met. The measures needed to restore the economy have been ?identified,? even if some of them could have been taken earlier, he said.
Bank Capital
Some of the steps could have been more radical, said Camille Viros, an economist at the wealth management division of Barclays Plc in London. The pension bill is ?a step in the right direction, but more still has to be done,? while the amount of additional funds lenders will need to meet new capital rules may be twice as much as the government estimates, she said.
Finance Minister Elena Salgado on Jan. 24 gave banks until September to meet the higher capital requirements and said the shortfall would be no more than 20 billion euros, ?all or part? of which will come from private investors. The government is pushing unlisted savings banks toward stock-market listings by setting stiffer capital requirements for unlisted lenders that aren?t at least 20 percent owned by private investors and that depend on wholesale financing. A law outlining the requirements and new rules on any state bailouts is set to be approved this month.
Zapatero?s policy U-turn has prompted a slide in his popular support, polls show. The opposition People?s Party would win 43 percent of the vote if elections were held now, compared with 28 percent for the Socialists, El Pais reported on Feb. 6.
Regional and local elections are scheduled for May and a general election is due by March 2012. Zapatero told Parliament in July he would restore Spain?s economy ?whatever it costs and whatever it costs me.? That price may be his political future; polls indicate Spaniards expect Deputy Prime Minister Alfredo Perez Rubalcaba to replace Zapatero as head of the Socialists? for the 2012 vote.
--Editors: Andrew Davis, Mark Gilbert
To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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