Spanish Prime Minister Mariano Rajoy may finally tell investors how he’ll tackle the euro area’s third-biggest budget gap (EUBDEURO) more than a month after winning the nation’s biggest electoral landslide in three decades. The wait has done little to damp a rally in Spanish bonds, which have been Europe’s best performers, gaining 8 percent since Nov. 20 when his Peoples Party ousted the Socialists. The yield on Spain’s 10-year benchmark bond rose 2 basis points to 5.19 percent at 10:40 a.m. in Madrid as Rajoy met with his Cabinet, before a press briefing at about 1 p.m. in Madrid. Rajoy faces the double challenge of convincing investors he can avoid following Greece, Ireland and Portugal in needing a bailout while rebooting a contracting economy (SPNAGDPQ) being choked by Europe’s highest jobless rate at 23 percent. Rajoy has said he needs to find at least 4 billion euros ($5.2 billion) in savings in the first quarter to meet his deficit goal for next year. “The market is less concerned in the near term about Spain and its ongoing funding needs, but this may change very quickly if the government doesn’t deliver something tangible soon,� said Georg Grodzki, global head of credit research at London- based Legal & General Investment Management, which oversees about $515 billion of assets. Bond Redemptions The drop in Spanish bond yields is giving Rajoy some relief as it eases the cost of funding more than 36 billion euros of maturing debt in the first quarter. Italy, which like Spain has come under threat from debt-crisis contagion, has more than 100 billion euros of bonds and bills to rollover in the period. Spain is scheduled to hold its first bond auction of 2012 on Jan. 12. Italy’s 10-year yield remains above the 7 percent level that led Greece, Ireland and Portugal to seek bailouts, even after the new government of Prime Minister Mario Monti passed more than 30 billion euros of budget measures to eliminate the deficit in 2013 and reduce debt. Italy’s total borrowing of almost 120 percent of gross domestic product dwarfs Spain’s 70 percent. “Spain is currently benefiting from the perception among investors that its problems are less severe than Italy’s given its smaller stock of public debt and lower funding requirements,� said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “The markets also appear willing to give the Rajoy government some breathing space, which has not been the case in Italy,� he said. Deficit Goals Rajoy said last week that all areas of public spending except pensions may be reduced as he seeks to trim the deficit to 4.4 percent of GDP next year and 3 percent in 2013 from the 6 percent that was pledged for this year. Some 1.9 billion-euro spending cuts may be approved by the Cabinet this morning, Expansion reported today, without saying how it obtained the information. The ministries of public works and defense will be most affected, according to the newspaper. A moratorium on public work projects is also among the possibilities being examined, Expansion reported earlier this week. The 56-year-old Rajoy has made Budget Minister Cristobal Montoro’s task more difficult by promising to raise pensions in line with inflation, a move that will cost more than 1 billion euros. Wage Freeze Extending a freeze on the wages of the 536,300 civil servants working for the central government and shrinking the public workforce through attrition also is being considered, said government spokeswoman Soraya Saenz de Santamaria on Dec. 23. Spain also may axe a subsidy granted to some young people under age 25 to help pay for their rent, newspaper ABC reported on Dec. 28. That’s popular perk in a country where youth unemployment is almost 50 percent. Whatever Rajoy announces today, he’s signaled that more drastic measures may be needed should Spain miss its 2011 deficit target. The deepening economic slump and the growing budget shortfalls of Spain’s autonomous regions threaten the 6 percent deficit goal. A Bloomberg survey of five economists points to a shortfall of 6.9 percent. The Bank of Spain today said non-residents’ holdings of Spanish stocks and bonds Spain declined by 36 billion euros in the first 10 months of the year, more than twice as much as during the same period of last year. The central bank yesterday confirmed available data suggest the euro area’s fourth-biggest economy contracted in the final months of the year as tourism and exports, the drivers of its first-half recovery, weakened while household spending and investment worsened. To contact the reporter on this story: Angeline Benoit in Madrid at abenoit4@bloomberg.net To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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