Zapatero’s Exit May Endanger Spain’s Fiscal Future

Prime minister withdraws from 2012 race, forcing primaries

Prime Minister Jose Luis Rodriguez Zapatero of Spain has thrown a wild card into his country’s financial future even as he announced his withdrawal from next year’s election. He made the announcement on Saturday, putting into question his country’s financial health even as the yield on the country’s bonds began to rise in the wake of the news.

Zapatero, according to a Bloomberg report, had pushed through the toughest austerity package in 30 years, and investors rewarded the measures by sending the yield on the nation’s bonds downward even while its neighbor Portugalsaw its own yields rise to record levels. Now, however, Madrid may be in for some turbulent times and the yields on its bonds have already begun to rise.

Stuart Thomson, a Glasgow-based fund manager at Ignis Asset Management, which oversees about $120 billion, was quoted in the report saying, “The politics are turning more difficult. There has been a lot of money coming into Spain; it started to underperform on Thursday and Friday and I suspect that underperformance will continue as a result of this.”

An El Pais March 26 report said that Emilio Botin, chairman of Banco Santander SA, had asked Zapatero to wait before announcing his withdrawal till 2012 to keep from spooking the markets; Zapatero’s withdrawal means that his Socialist party, trailing in the polls, will have to find a new candidate; Zapatero reportedly told party members that primaries would be held after the local and regional elections on May 22.

Zapatero had reversed his stand on fiscal policy last May in the wake of Greece’s crisis and pushed through changes that included a 5% public wage cut, pension and benefit reductions, and labor market measures making it cheaper for companies to fire workers. The changes led to the first general strike in the country in eight years and sent the Socialist party plummeting in the polls. Currently Spain has the highest unemployment rate in Europe, topping 20%.

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