Spain thrust into debt-crisis spotlight again

Spanish financial markets slumped Monday after voters angry about austerity measures dealt the governing Socialist party a painful loss in local and regional elections, raising doubts over the country's ability to enforce debt cuts.

Investors worried that the government of Prime Minister Jose Luis Rodriguez Zapatero had lost support in its drive to heal public finances and faced a period of political uncertainty. Daily protests against both the Socialists and the opposition conservatives, meanwhile, were spreading to cities across the country and expected to last for days.

The Ibex 35 index on the Madrid stock market closed down 1.4 percent and the yield on Spanish 10-year bonds on the secondary market was up to 5.5 percent. That indicates investors are more cautious about the country's ability to repay its debts.

The spread, or difference in yield between that bond and the equivalent benchmark German one, stood at about 250 basis points in the afternoon, up from 240 on Friday. A basis point is one-one hundredth of a percent.

The governor of the Bank of Spain said the country cannot sustain spreads of more than 200 basis points for a long period because this will raise government borrowing costs and leave less money available for providing financing for companies and getting stagnant credit flowing again.

Miguel Angel Fernandez Ordonez also said in a speech that the government needs to press ahead quickly with labor market reforms to create jobs and reassure investors. He called for more flexibility in how collective bargaining agreements are negotiated. Economists say the current system is too rigid because in a given sector it treats money losing and profitable companies with the same terms when it comes to giving workers raises.

Investor appetite for Spanish bonds will be tested Tuesday with a treasury auction of 3- and 6-month bills.

Alejandro Varela of brokerage Renta 4 in Madrid said that besides debt worries spilling over from other troubled countries such as Greece, investors feared that conservatives taking over town halls and regional governments might discover bigger debt piles than had been previously disclosed.

That's what happened late last year when the wealthy and powerful Catalonia region held similar elections. The center-right Catalan nationalists took over from a Socialist-led coalition and recently announced the region's deficit was much bigger than previously known. Catalonia did not vote on Sunday.

In 13 other regions that were up for grabs Sunday, the conservative opposition Popular Party won virtually all of them from the Socialists, causing new debt concerns to sprout, Varela said.

"There had been speculation to this effect for a week and now that melon will be sliced open," Varela said.

The Popular Party also cleaned up at municipal elections by winning 2 million more votes than the Socialists with a margin of victory of about 10 percentage points. The party said those numbers show Spain is hungry for change.

Varela said he expects Zapatero to call early elections and that it would be good for the country, although the prime minister said Sunday night as he acknowledged defeat by his party that he would not and plans to serve out his term. General elections must be held by next March. Zapatero has said he will not seek a third term.

Varela said, "Spain is in a very weakened situation and this transitory period is particularly dangerous."

The Popular Party favors early elections but on Monday refrained from calling for them outright.

"Spain can't wait another year," said party Secretary General Maria Delores de Cospedal. "No more time should be lost."

She ruled out, however, trying to push a no-confidence vote through Parliament where the Socialists still have enough allies to reject it.

The elections were local and regional, but many Spaniards said they had the national picture in mind as they voted. The country is saddled with a eurozone-high jobless rate of 21.3 percent and is struggling to recover from nearly two years of recession triggered by the collapse of a real estate bubble and the end of an overzealous period of free-flowing credit.

For the past week, central Madrid's Puerta del Sol plaza has been home to a makeshift protest camp to mainly young Spaniards angry over their bleak economic prospects — the youth jobless rate exceeds 40 percent. The protesters dismiss both Socialist and conservative politicians as inept, corrupt and distant from the plight of everyday people and said the elections result made little difference to them.

"It's not that important because this protest never had an electoral goal," said Javier Perez, one of the Madrid camp's spokespersons. "In the end, the results are another example of Spain's two-party system and how it fails to resolve the anger, the indignation and our problems."

United behind the slogan "Real Democracy Now", the Madrid protest has drawn tens of thousands of people of all ages and spread to dozens of other cities. On Monday, the activists debated how to proceed with their campaign after voting Sunday to stay on for at least another week. They discussed gradually dismantling the camps and taking the protests to city neighborhoods to get more people involved.


Associated Press writer Jorge Sainz contributed to this report.