Analysis: Spain's leader could learn some lessons from Portugal

MADRID/LISBON Wed Jul 18, 2012 10:42am EDT

1 of 2. Spain's Prime Minister Mariano Rajoy adjusts his glasses during weekly cabinet control session at Madrid's Parliament July 18, 2012.

Credit: Reuters/Sergio Perez

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MADRID/LISBON (Reuters) - Spanish Prime Minister Mariano Rajoy could learn some lessons about communication from neighboring Portugal as he struggles to restore confidence in Madrid's public finances and avoid an international bailout.

Spain's borrowing costs have soared, bringing the country dangerously close to being shut out of the bond markets even after euro zone partners promised aid for its ailing banks and Rajoy announced a new austerity plan last week.

Much smaller Portugal has already been rescued, to the tune of 78 billion euros, and is slowly winning back some investor confidence, slashing its budget and privatizing state companies under close monitoring by a troika of the European Central Bank, the European Commission and the International Monetary Fund.

Both countries are ruled by center-right governments that enjoy strong majorities in parliament after voters fed up with economic crisis threw out the previous Socialist governments.

But there the similarity ends.

Portuguese Prime Minister Pedro Passos Coelho and his ministers have adopted a tough neo-liberal mantra while Rajoy began by striking a defiant, nationalist tone and sending mixed messages to markets about how he would tackle problems in Spain's banks, budget deficit and overspending regions.

Rajoy dragged his feet in taking some early measures, denied any need for outside assistance for the banks until the last minute, then left ministers to make the unpopular announcements.

"Mariano Rajoy has done good things. If you look at the substance, it goes pretty far but it is true that the communication has not always been a success," said Gilles Moec, an economist at Deutsche Bank.

"A kind of bubble of uncertainty was created, around the regions, the banks, and it has consequences on the markets."

Passos Coelho has won a reputation for strict obedience to painful, German-driven recipes for cuts in social spending. He and top officials have met individually with big investors in Germany, China and the United States to sell their story.

Portuguese Finance Minister Vitor Gaspar, a former European Central Bank research chief and European Commission policy wonk, has unchallenged authority over the economy and public finances, with full backing from Passos Coelho.

By contrast, lines of responsibility for Spanish fiscal and economic policy have been blurred and sometimes crossed between Economy Minister Luis de Guindos, Treasury Minister Cristobal Montoro and Rajoy's own economic advisers.

Rajoy pledged budget discipline but unilaterally loosened Madrid's deficit target, then had to negotiate with Berlin and Brussels for flexibility, while pleading in vain for the ECB to step in and buy Spanish bonds to calm markets.

"The government of Portugal has been better at communicating its strategy in a consistent and credible manner to investors," said a senior buy-side analyst who has visited both capitals.

"Senior officials there are articulate and persuasive and seem to be genuinely committed to implementing their reform program," the analyst said.

The same source said the goalposts keep moving for Spain and the government has struggled to rebuild credibility because it has had to respond constantly with new measures.

POLITICAL RESOLVE

Other asset managers who visited Madrid said they were ready to be convinced by political resolve but were frustrated at vague answers on government plans to crack down on overspending by the 17 autonomous regions, a key source of fiscal slippage.

"It is also fair to say that your capacity to obtain a clear information is lower in Spain than in Portugal. For instance, if you want to know exactly what's going on with the regions, you need to read 1,950 pages. We have no time for that," Moec said.

Explaining the Portuguese government's resolve, political scientist Antonio Costa Pinto of the University of Lisbon recalls that unlike Spain, Portugal did not enjoy an economic boom before the 2008 financial crisis struck.

"The government knows too well that the country stagnated for the last decade, so they really need to find a way out," he said. "Spain, for its part, still hopes to return to pre-crisis prosperity, so it tends to resist imposed austerity."

The contrasting approaches are also steeped in the Iberian neighbors' divergent history and culture.

The much smaller Portugal takes pride in its stubborn resistance to Spain's attempts to conquer it over the centuries, helped by the world's oldest political alliance with England. This background may make Portugal more disposed to accept the Anglo-Saxon and northern European rationale.

While the Portuguese are coping stoically with austerity prescribed by Brussels and Berlin, some Spaniards, with a tradition of quick temper, pride and bullfighter bravado, have responded to cuts impelled by Europe's paymaster Germany with anger and street protests.

Portugal is meant to return to the bond market in the last quarter of 2013. Its 10-year bond is yielding a stressed 10 percent-plus on the secondary market, although well down from the record level of more than 17 percent it hit in January.

Spain is still regularly issuing long-term debt on the primary market, but its 10-year bond yield has flirted with the 7 percent level seen as unsustainable in the medium term.

TAKING ADVICE

The Portuguese government has used the services of international communications consultants Brunswick to help build its image with the troika of lenders and with investors.

Lisbon has excelled at keeping the troika content, with the result that there is very little negative comment about Portugal from Brussels or other European capitals.

However, economist Jose Carlos Diez at Intermoney in Spain said pleasing the troika is no guarantee of salvation.

"Portuguese bonds will remain junk next year. They won't be investment grade as the economy won't grow," said Diez. "When the troika is happy, I'm afraid. They are a good contrarian indicator."

Both countries face sharp recession this year and may not return to growth next year, according to latest IMF forecasts.

Still, Moody's Investors Service says it sees "room for optimism" over Portugal's budget and economy, while another credit rating agency, Fitch, praised its privatizations and efforts to restructure public companies.

Lisbon has also won plaudits for keeping its head down and steering clear of the European war of words over common euro bonds or stimulus measures.

"It's not really the grades that make it the good pupil, but behavior," said Filipe Garcia, economist and head of Informacao de Mercados Financeiros consultants in Porto.

CACOPHONY

Rajoy and his cabinet spent their first six months in office sending conflicting messages to the markets over their budget plans, the state takeover of troubled bank Bankia, the wider banking rescue, how regional budgets will be controlled and their access to markets.

"When he does issue statements, Rajoy is directing his message to the Spanish public, to voters, but the priority should be to recover the confidence of the markets. There's a tremendous cacophony," said a communication expert in Spain.

Senior officials in Brussels also say that the Spanish government has lost credibility and will be left with little room for maneuver in implementing its economic policy.

But Rajoy, who has shied away from the spotlight and left his ministers make tough announcements such as the European rescue for the country's banks, may now be changing strategy.

Last Wednesday, he truly stepped up to the firing line for the first time, announcing a raft of new austerity measures in parliament in a dramatic speech.

(Additional reporting by Julien Toyer; Edited by Tracy Rucinski and Paul Taylor)

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