Spain risks firestorm over pensions in an effort to impress the markets

City A.M. Reporter
THE Spanish government’s desperation to calm financial markets means it will risk a political firestorm to impose new pension rules that may not even help its budget for at least a decade.

Urged by Brussels and economists, the cabinet is bringing forward the reform, which raises the retirement age -- aiming to show it making the hard choices needed to secure public finances and deal with an ageing population in the long-term. The cabinet has already passed a record austere budget and taken tough steps to rationalise its small banks. Over the past week it has also rushed out other measures including state selloffs to ease its cashflow issues.

The pensions reform, however, is about convincing investors of its commitment to structural change; savings built up over the last decade mean it will have no impact before 2015 and bring only gradual benefits in the years that follow. That deals with none of the issues of banking, local government spending and growth which have driven a bond market sell-off that shows little sign of abating after engulfing Ireland and Greece.

Yet Prime Minister Jose Luis Rodriguez Zapatero last week pulled forward his target for passing the legislation to January from an initial end-March deadline.

Madrid’s cost of borrowing continued to rise yesterday – reaching 5.47 per cent on its 10-year bonds – close to levels which drove Greece and Ireland to the IMF.