In his acceptance speech, Mariano Rajoy sketched the guidelines of his agenda. While the specifics are not finalized, Rajoy emphasized a change in tone with respect to his predecessor Zapatero, who refused to give in to common sense for way too long. In stark contrast, the incoming president will put something really important in front of the EU and the markets by offering a speedy schedule of reforms that, for the most part, will be completed within three months. The major financial overhauls will require six months of work.
Besides saying that he would modernize pension plans, Rajoy promised that he will revise each part so that it meets established EU national deficit requirements. Based on figures inherited from Zapatero?s socialist party regime, Rajoy announced a plan to cut back some 16.5 billion euros in spending, an undertaking that will not be easy if taking into account the fact that unemployment wages and financing costs will comprise most of government spending and that the last government has already applied the easiest cuts when they halted further investments. Still, it is possible that growth predictions will not pan out and that the last government?s balance sheets could be inaccurate.
For this reason, it looks like the populists are going to approve the budget that they are inheriting from Zapatero?s team, but with generalized cuts of eight percent. And as soon as the state of the country?s accounts is confirmed, they will execute additional cuts to take place likely before June. Rajoy explained that he will focus on restructuring the public administration (at which point the nationalists accused him of wanting to suppress the Estado Autonómico, the name of Spain?s system for balancing federal and state governments also referred to as the Estado Regional) and the rationalization of his material and human resources, including state-funded television and unemployment benefits. Nonetheless, the Spanish leader did not mention anything about the welfare state system and the reforms needed there to make Spain more competitive.
The drawback of a drop in value greater than 16.5 billion euros is that it will create a sharp reduction in activity. Due to this drop the other reform that Rajoy is pushing will be essential: overhaul the financial sector. Credit is tight and restructuring the banking industry will further close up financing even more than the PP considered in their apt reform measure. It is critical that the reforms be conducted in the most exhaustive manner possible in order for the banks to recover their ability to make loans.
Rajoy said that he would force the sale of real estate assets owned by the banks.
This measure would necessitate an increase to required bank provisions, such that prices could fall to prices that are truer to the current economic climate and lenders would prefer to sell them instead of holding them on their balance sheets. If the sales go through successfully, then real estate prices could normalize and recharge the housing market.
But what will be done with assets that are not as liquid? Rajoy wants them to be assessed prudently. And that process could very well be wedded with the German idea of a bad bank, which suggests the creation of some sort of external company that the assets would transfer into. The bad bank would allow losses to be examined little by little and outside the scope of the strictest financial regulation. Yesterday?s good news about the bad bank is that more weight will be given to the technical work performed by Bank of Spain inspectors. The bad news is that this scheme might not purge the banking sector well enough.
Rajoy also proposed a series of measures that favor entrepreneurs, mostly related to tax incentives, education reforms needed to lift Spain above the bottom of the pack in Europe, an energy model based on subsidies, and cuts to stringent business regulations aimed at improving efficiency. Clearly, Rajoy?s speech augurs a path of hard changes. The contents of his message are intuitive enough, but the execution of his plan will bring Spain face to face with myriad risks.
