Spanish elections: Restoring confidence is key task for next government

The priority for the next government after this weekend’s general election in Spain will be to act quickly to restore investor confidence, according to Angel Martínez-Aldama, director general Inverco, the Spanish asset management and pension funds association.

“The elections should clarify doubts about reforms, so it’s important that the results should be clear-cut for one or the other party,” he said.
The centre-right Popular Party (PP) is expected to win with a clear majority in Sunday’s elections according to the latest polls, replacing the socialist government led by Jose Luis Rodriguez Zapatero since 2004.

Whoever wins will face a difficult task and be under immediate pressure to demonstrate that the new government has both the policies and the will to act to resolve the crisis that has brought Spain close to needing a bail-out as did Greece and Portugal.

Analysts say the new government’s priorities must be to rebuild the economy, reform labour markets and sort out the troubled banking sector. “It will not be easy because we are in the midst of international crisis,” said Martínez-Aldama.

Spain has come under increasing pressure as its borrowing costs have risen sharply to above 5% for one year money, compared to 1.8% for Germany.

“At current yields, Spain would need a primary surplus of 1.8% just to keep its debt to GDP stable in the long run,” a calculation by Breakingviews. The next prime minister will need to re-establish confidence fast, it said.

The urgency was underlined on Thursday when Spain paid more than at any time since 1997 for 10-year debt, selling €3.6bn of a new 10-year treasury bond with average yields of 6.975%, only just below the 7% level regarded as unsustainable by many market participants.

Market participants agree that rebuilding confidence is a priority, but the difficulty is how this can be done when much of the current pressure on Spain is due to external factors over which it has little control. That pressure is likely to continue until there is a definite solution to the eurozone debt crisis.

The domestic outlook is not encouraging. The economy is stagnating and unemployment at around five millions or close to 23% of the workforce, has shot up from 8% a year earlier.

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