Prime Minister Zapatero on the edge

Polls indicate Prime Minister José Luis Rodríguez Zapatero's ruling Socialist Party (PSOE) could lose to the center-right Popular Party (PP) in at least one key region, setting the stage for a defeat in general elections expected early next year.

But regional losses contain a potentially bigger threat. Analysts say that as new regional governments take power, there may be revelations about higher debt levels than previously known.

After regional elections in Catalonia last year swept out the ruling Socialists, the new government gradually revealed a budget deficit of 3.9% of its gross domestic product for 2010, well above a 2.4% limit the government has imposed and above an estimate of 3.6%.

Investors have good reason to be cautious of the oil market as conflicting impulses look set to keep prices volatile
The Balearics
The autonomous regions in total contribute about one quarter of Spain's budget deficit.
There are some indications the Socialists could lose power in not just the big region of Castilla-La Mancha, but also in Extremadura, here in the Balearics and Asturias, which has made economists nervous about further financial skeletons coming out of the closet.

After tumbling 17% in 2010, Spain's IBEX 35 stock index has gained just over 5% this year. But it's been bumpy.
With Greece, Ireland and Portugal having requested bailouts, investors don't completely discount the possibility that Spain may need financial aid if its situation worsens.

Gonzalo Lardíes, who manages the €14 million BPA Ibérico Acciones fund, said this year has been much better for his Spain-focused fund, compared to 2010 when he said it was a success “just to get a meeting with potential investors.” Risks remain “The IBEX went down 17% last year and now our fund is up 7.3% in terms of performance for the Spanish market. It was complicated to sell Spanish equities, but things have changed and people are now more open to talk about Spanish equities,” said Madrid-based Lardíes. About 90% of the fund‘s holdings are Spanish stocks and 10% are Portuguese stocks.

Risks remain for Spain and its investment profile, chiefly the problem of debt refinancing, he said. The government plans to issue around €94 billion in bonds this year. “If new issues come with high coupons, it could present a dangerous problem for the Spanish market,” he said. “They are already more elevated than they were a year ago.” “The solution is to increase taxes income through greater fiscal pressure now that economic activity is weak, but that isn't very desirable,” said Lardíes.

The government's own forecasts call for growth of just 1.3% this year. “The other option is to reduce spending, which is more possible, especially in autonomies and local governments.” “I hope that after the weekend elections, important measures will finally be taken,” said Lardíes.
Juan José Rubio Guerrero, professor in public economics and vice chancellor of international relations at the University of Castilla-La Mancha in Ciudad Real, is in the heart of a hotly contested region that could return to the center-right PP after around 30 years of Socialist rule. He said voters are frustrated by the way the Socialists seem to have inherited power over the years, and its mishandling of some key events. “There are many relationships between businesses and politicians — strange relationships. I think at this moment we need to change these types of relations, but it is possible only if we have a change in the government,” said Guerrero.

Savings bank mess
Of the region's more than 2 million inhabitants, some 200'000 were out of work as of April. But voters here also blame the Socialists for economic mismanagement, said Guerrero. First is the mess of savings bank Caja Castilla-La Mancha. The caja was taken over by the Bank of Spain in 2009, then cleaned up and auctioned off to merge with another caja, Cajastur. Then there is the Ciudad Real Airport, which cost a reported €1 billion to build, but traffic has been low and the future is said to be bleak.

The PSOE has held the presidency of the region for nearly 30 years, but a close race is expected from PP-challenger María Dolores de Cospedal. “Fundamentally, I think the biggest problem at the moment for the Socialist Party is the common problem in all Spanish states — people are fed up with the management of Zapatero,” said Guerrero.

Zapatero announced in April that he will not seek re-election, and Socialist primaries will likely be held some time after the local and regional elections to find a new leader for the general elections.