Rajoy Party Wins Spanish Elections After Debt Crisis Overwhelms Socialists

By Emma Ross-Thomas and Ben Sills - Nov 21, 2011 5:04 PM GMT+0700

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Nov. 21 (Bloomberg) -- Bloomberg's David Tweed reports on the victory of Mariano Rajoy in Spain's elections, winning the biggest parliamentary majority in a Spanish election in almost 30 years. (Source: Bloomberg)

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Nov. 21 (Bloomberg) -- Antonio Garcia Pascual, chief southern European economist at Barclays Capital, talks about capital requirements at Spanish banks and the country's austerity measures following the election of Mariano Rajoy as Prime Minister. He speaks with Maryam Nemazee and David Tweed on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Mariano Rajoy won the biggest majority in a Spanish election in almost 30 years, and told Spaniards to brace for hard times as the nation fights to avoid being overwhelmed by the debt crisis. Bonds continued to drop.

Rajoy’s People’s Party swept the ruling Socialists from power after eight years, winning 186 of the 350 seats in Parliament, compared with 110 for the Socialists’ candidate Alfredo Perez Rubalcaba. That’s their worst result in more than three decades, as smaller parties including Communists increased their share of the vote. Opinion polls in the month before the vote showed the PP winning 184 to 198 seats.

“Hard times lie ahead,” Rajoy, 56, told supporters outside the PP’s headquarters in Madrid, giving no new details of his plans. “We are going to govern in the most delicate situation Spain has faced in 30 years.”

Spanish borrowing costs continued rising toward euro-era records even as the PP won a mandate to slash the budget deficit, overhaul the stagnant economy and reduce the 23 percent jobless rate. Rajoy, who hasn’t given details of his proposals, won’t take over for a month, prompting him to say on Nov. 18 he hoped Spain wouldn’t need a bailout before he’s sworn in.

Bonds Fall

Spain’s 10-year bond yield rose to 6.538 percent from 6.379 percent on Nov. 18. It rose as high as 6.78 percent on Nov. 17, back at the levels Spain was paying before it joined the euro. The gap between Spanish and German borrowing costs widened to 465 basis points and the Ibex 35 stock index fell 1.9 percent.

Miguel Arias Canete, head of the PP’s electoral committee and a former minister, said today markets need to give the party time, as ministers won’t be appointed until Dec. 21 and Spanish law doesn’t allow Parliament to resume any sooner than Dec. 13. The PP’s senior members meet at 5 p.m. today in Madrid.

“We need to be very convincing during these days and hope that they give us the breathing space to be able to put in place the necessary measures,” he said in an interview with Es Radio.

Rajoy may be hard pressed to make a big difference without bolder steps from the European Union and the European Central Bank to contain the spread of the debt crisis that started in Greece two years ago, said Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London, said in an e-mailed note.

‘Last Resort’

“We consider swift implementation of structural and fiscal policies as a necessary but possibly insufficient condition for the Spanish sovereign bond market to stabilize,” Antonio Garcia Pascual, chief southern European economist at Barclays Capital in London, said in an e-mailed note. “We still see little practical alternative to a strengthened commitment by the ECB to act as lender of last resort.”

Rajoy pledged after the results last night that Spain would “stop being a problem and become part of the solution again,” in Europe, as he called for a “common effort.” “There won’t be miracles, we haven’t promised any,” Rajoy said.

“Rajoy will have no option but to announce a package of extraordinarily tough reforms to convince the markets and his European partners Spain is different from Italy and Greece,” said Jose Antonio Sanahuja, a professor of international relations at Madrid’s Complutense University.

Fighting for Euro

The PP, which shepherded Spain into the single currency in 1999, campaigned on its economic record, which includes eliminating a 7 percent budget deficit in the eight years to 2004 and reducing the gap between Spanish and German borrowing costs from 300 basis points to seven. Unemployment fell to 11 percent from 18 percent as a construction boom fueled hiring.

Now seven years after the fall of the PP government that qualified Spain for the single currency, Rajoy will be fighting to remain in the euro. He inherits a deficit the European Commission says will be almost 7 percent of gross domestic product and a banking system struggling to find funding and saddled by bad loans from the real-estate boom.

Rajoy has pledged to cut the deficit by a third to 4.4 percent of GDP next year and finish the “restructuring” of the banking system. The new government will also have to crack down on spending in Spain’s autonomous regions, where budget overruns threaten the deficit goal. The PP already controls 11 of the 17 regional governments and won control of most municipal administrations in May. That may make it easier to reorder finances in the regions, which have 133 billion euros in debt.

Protecting Pensions

Rajoy has said he will cut “superfluous spending,” without giving details, and hasn’t said how he will overhaul the financial system. He has pledged to maintain the purchasing power of pensions, which accounted for 112 billion euros ($151 billion) this year, and said everything else can be trimmed.

For Rajoy the victory over the Socialists comes after he suffered two defeats to outgoing Prime Minister Jose Luis Rodriguez Zapatero. After Aznar decided not to run again, he chose Rajoy to lead the PP in the 2004 election.

Rajoy was ahead in the polls when three days before the vote a terrorist attack on commuter trains in Madrid’s Atocha train station killed 192 people. The bombing triggered a backlash against the PP government, which tried to blame the bombing on Basque terror group ETA, even after an Al-Qaeda- linked group claimed it carried out the attack to punish the Aznar government for backing the U.S.-led war in Iraq.

Riling the Base

Zapatero, who alienated traditional voters by cutting wages and changing labor rules to favor employers, was replaced in the campaign by Rubalcaba, his former deputy. His pledges to tax banks and the rich weren’t enough to woo back voters.

The landslide was due to a collapse in support for the Socialists, rather than a surge in backing for the PP. The PP won 10.8 million votes, compared with 10.3 million four years ago. Support for the Socialists plunged to almost 7 million votes, from 11.3 million in 2008. United Left, which includes Communists, won 11 seats, up from two, while Union Progress & Democracy, a party that wants to limit the power of the regions, took five seats, compared with one in the last election.

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