The capital markets would be likely to punish Spain’s new Prime Minister if he respected the traditional pace of forming a new government after the general election on 20 November, according to a number of banking sources interviewed by mergermarket. One banker who takes an overview of the Spanish market said that election front-runner Mariano Rajoy cannot afford to wait until he formally takes over as Prime Minister over the Christmas break before announcing detailed austerity measures. The banker said that Rajoy should break with tradition and announce the members of his new government within a couple of days of the 20 November vote. The banker said that Rajoy should then announce the details of his action plan within a fortnight, after a token consultation with Spain’s trade unions. The banker said that any traditional idea of having 100 days to get up and running is obsolete due to the ongoing chaos in the markets. Meanwhile, an economist who is following the situation said that at the very latest Rajoy will have to announce very aggressive austerity measures in his very first cabinet meeting in the beginning of January. The economist said that the markets will want to see him cutting the deficit, improving credit and liberalizing markets, all at the same time. The banker and the economist, as well as other sources, said that very swift action is needed because bond spreads from peripheral members of the euro zone have soared above German benchmarks on fears that the single currency might not survive its current crisis. Spanish five-year bonds are yielding 5.23% (430 basis points over the German equivalent) and 10-years are yielding 5.96% (415bps over Germany). The European Central Bank (ECB) has been buying bonds in the market. Meanwhile, Greece and Italy have both had to accept technocratic governments to get their debt under control. In a recent debate with Socialist leader Alfredo Perez Rubalcaba, Rajoy said that he will seek to create jobs for Spain’s 5m unemployed through labour market reforms and austerity measures. However, he declined to discuss his plans in detail. By contrast, Rubalcaba called for further stimulus measures to accompany a slower pace of reforms. The latest opinion polls suggest that Rajoy’s Popular Party (PP) continues to be on track to a historical outright majority. Even so, he has said that he will seek the support of minority parties in order to get his agenda through parliament. He is particularly concerned about ballooning debt at the local and regional levels. An adviser who follows Spain’s banks said that Rajoy has “no magic wand,” adding that any cuts to the welfare state or tax raises will prove highly unpopular. Spain’s two main unions have in the past organized general strikes against governments that have tried to push reforms that they have perceived to go against their interests.
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