Spain Debt Sale Precedes Vote on Balanced Budget Amendment

The Spanish Treasury sold €3.62 billion, or $5.2 billion, of five-year bonds in what was seen as the first significant market test for Madrid since the European Central Bank started buying Italian and Spanish debt last month to offset an unsustainable increase in their borrowing costs.

The prospect of the sovereign debt crisis expanding to two of Europe’s largest economies, following bailouts of three much smaller countries already, has threatened to sink the bloc’s monetary union after roughly a decade of existence.

The Italian government responded last month by introducing a new package of austerity measures to balance its budget in 2013, one year earlier than planned.

Under pressure from investors, as well as from Germany and France, Prime Minister José Luis Rodríguez Zapatero last week proposed writing a “principle of budget stability” into the Spanish Constitution.

With backing from the main opposition party, the lower house of the Spanish Parliament was expected to approve that reform on Friday, with the upper house expected to follow suit next week.

The Spanish bonds were sold at an average yield of 4.49 percent, down from 4.87 percent on July 7, when the Treasury last sold similar bonds. The auction, however, attracted less demand than the sale in July, and the amount fell short of an upper goal of €4 billion.

“The auction went through, but the result was, over all, disappointing,” said Chiara Cremonesi, a fixed-income strategist at UniCredit in London.

Both borrowing costs and demand dropped at an auction of 10-year bonds in Italy on Tuesday.

Spain’s fast-track constitutional reform has triggered opposition from citizens’ groups, trade unions and smaller political parties. They argue that a referendum should be held before modifying the Constitution, which Spain adopted after returning to democracy in the late 1970s.

Vicenç Navarro, a professor of political sciences at the Pompeu Fabra university in Barcelona, has also argued that rushing reform would weaken democracy in Spain. Mr. Navarro helped launch Actuable, a citizens’ platform that has been collecting signatures demanding a referendum.

Responding to such criticism, José Blanco, one of Mr Zapatero’s senior ministers and the spokesman for his government, told the radio station Ser on Thursday that the government would have liked to “share with citizens” so big a step but had been forced to act speedily given the severity of the crisis and the financial market turmoil.

The two largest unions in Spain are planning a protest march in Madrid on Tuesday, before the Senate vote.

However, the amendment is almost certain to be endorsed by lawmakers. Mr. Zapatero, a Socialist, has already reached agreement with Mariano Rajoy, leader of the center-right Popular Party.

“The main parties in Spain are interested in showing the markets that they are really committed to fiscal consolidation,” said Antonio Argandoña, an economics professor at the IESE business school in Barcelona.

Analysts note, however, that even with the amendment, the hard work of actually reining in spending and reviving the economy still lies ahead.

The constitutional change is “designed mainly to give confidence to the markets and is not really a solution to the problems of the economy,” Mr. Argandoña said.

Meanwhile Portugal, whose bailout in May followed similar rescues for Ireland and Greece, has been struggling to prove its own commitment to tighter budgets. The center-right government on Wednesday presented further tax increases for corporations and wealthy individuals, as well as an extended freeze on hiring and public-sector wages, to return Portugal to a balanced budget by 2015.

For this year, the government has pledged to cut the deficit to 5.9 percent of gross domestic product, from 9.1 percent last year. However, it recently recognized that further measures were needed to offset a fiscal shortfall of as much as €2.5 billion so far this year.

Analysts at Barclays Capital described the additional fiscal measures as “a necessary condition” for the government of Prime Minister Pedro Passos Coelho to meet its budget target.

But, in a note to investors published Thursday, the analysts also warned that Lisbon would need to accelerate structural reforms, in particular an overhaul of Portugal’s rigid labor market legislation, despite the fact that such far-reaching changes would face hurdles.

“Some of the structural reforms may require constitutional amendments that will need the political support of the Socialists, the main opposition party,” the Barclays analysts noted.

Article source: http://www.nytimes.com/2011/09/02/business/global/spain-debt-sale-precedes-vote-on-balanced-budget-amendment.html?partner=rss&emc=rss