Spain govt takes risk on pensions to placate market

 

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 aimed at soothing 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.

"The government has pushed through a lot of measures in the past weeks due to pressure from the markets and from other European governments," said Nicolas Lopez, director of analysis at M&G Valores.

"I wouldn't exactly call the government's actions panic but it is a response to market pressure. On pensions, the government has tried to resist for as long as possible."

Madrid's cost of borrowing continued to rise on Monday - reaching 5.47% on its 10-year bonds - close to levels which drove Greece and Ireland into the arms of the IMF.

PENSION AGE CONTENTIOUS

As elsewhere in Western Europe, Spain has to deal at some stage with the an aging population that will outlive the contributions they have made to the pension system during their working lives.

A lower birth rate than many of its neighbours will also add to pressure over the next 20 to 30 years and reforming the system goes some of the way to addressing the broader issue of Spain's problems of competitiveness.

"People are getting older independent of good or bad (economic) times. This is the case in most of Europe, but particularly in Spain," Ignacio Eyries, Chairman of insurance firm Caser said.

Pensions could account for 14 percent of Spain's public expenditure by 2040-2050, compared to between 8.5 and 9 percent in 2010. Raising the retirement age would shave 20 billion euros off the state's pensions costs, or 2 percentage points off GDP, by 2030, according to recent Economy Ministry data.

For the moment, however, a decade-long boom has allowed the social security system to post a surplus and most economists say its reserve fund will cover pension requirements to 2015.

"The key indicators for the markets are Spain's deficit, debt and growth prospects. The social security system is not a risk (currently)," said Ismael Crespo, analyst at Fundacion Ortega y Gasset.

POLITICAL RISKS

The move to bring forward the reform is seen as a warning to the opposition and trade unions that if they fail to give ground on the bill's key points the government could pass the reform by decree and bypass the consensual bargaining process.

"Zapatero is turning up the heat on pension reform, raising the stakes by bringing forward the whole process," Crespo said.

Pension reform is highly contentious in Spain and Zapatero is risking further industrial upheaval and strikes, as well as a worse than expected drubbing for his Socialists in municipal elections in May.

The parliamentary commission on pensions is studying around 60 proposals but the key sticking point is the move to make people work to 67 instead of 65. Economists say that without it, the reform will be a meek compromise.

"Pension reform could happen in 24 hours as there is already a high degree of consensus on the government's proposals. But raising the retirement age remains the sticking point," Tomas Burgos, who represents Spain's main opposition Popular Party (PP) in an all-party commission on pensions, told Reuters.

"Neither the PP, the unions, nor business leaders want the government to forcefully raise the pension age," he said.

The government has set a precedent by passing its labour reform by decree law, after failing to reach agreement. But if the pressure from international markets eases, Zapatero could duck a final decision until after the local polls.

Unions - who flexed their muscles earlier this month in a flash air controllers strike that left thousands stranded - are unlikely to back down on their rejection of raising the retirement age, a measure they say would cut the state pension by an average 6 percent.

They have also rejected the proposed increase in contributions on the basis that this would affect over 2 million people, particularly women and part-time workers.

While not ruling out the government could push through the pension reform by decree, Burgos warned against it.

"What better signal could Spain give the EU and the markets than a pension reform which has been agreed at both the social and political levels," he said.