Factbox: Key risks to watch in Spain

MADRID (BestGrowthStock) – Spain is struggling to convince debt markets that it can make the painful cuts and reforms necessary to cut its fiscal deficit from 11.4 percent of GDP in 2009 to the EU limit of 3 percent by 2013.

Following are key risks that could affect market perception of Spain’s country risk:

UNIONS BLOCK REFORMS

Unions say they will stage protests at the end of February against the government’s plan to raise the retirement age to 67 from 65. This is a warning shot to the government that unless it desists it could face a general strike.

The government has backed down in the past when faced with criticism of measures such as a proposal to raise income tax, so it is hard to gauge its level of determination to take on the unions. In the past, general strikes have met with varying degrees of success, but a poll in a left-wing daily indicated that 49 percent of Spaniards would support one.

Unions are also bound to oppose any cuts to social spending or wages. So far, the government’s 50 billion euro ($68.31 billion) austerity package only includes a hiring freeze for the public sector. Economists say this is insufficient.

UNEMPLOYMENT CONTINUES TO RISE

Spain’s unemployment rate is close to 20 percent, with more than 4 million people out of work. Some in the main opposition party have warned the jobless total could rise to 5 million this year. Any significant rise above 20 percent will force the government to spend more on unemployment benefits, restrict already weak consumer demand, and worsen debt problems. It would also make further austerity politically more difficult.

SPENDING CUTS FAIL TO SATISFY MARKETS Analysts are concerned that the government will not manage to enforce severe spending cuts and meet its commitment to reduce its deficit to 3 percent by 2013. Economists believe the forecast of economic growth returning to around 3 percent by 2012, on which its deficit projections are based, is far too optimistic. They also doubt that cuts in public wage costs of 4 percent, and a rise in value added tax of 2 percentage points from July, will be sufficient to bring down the deficit enough.

GOVERNMENT FACES NO CONFIDENCE VOTE

The conservative opposition Popular Party has indicated that if it were sure of winning a parliamentary no confidence vote it would try to topple the minority government. In that case, Jose Luis Rodriguez Zapatero would be deposed and replaced as prime minister by a candidate of the Popular Party.

So far there is no sign of the PP gaining the support of key regional parties such as Catalonia’s Convergencia i Unio needed to give it the 23 additional votes to win such a motion.

EARLY ELECTION

While the unions are turning against him, Zapatero’s hold on the Socialist Party is still firm. A general election is not due till 2012. But cracks are beginning to appear, with criticism by former Prime Minister Felipe Gonzalez and from the head of the regional government of Castilla La Mancha. An early election is a long-shot but could become more likely if Zapatero began to lose the support of his power base. If he could no longer govern effectively, the prime minister might call an early election.

RATINGS AGENCY DOWNGRADE

Ratings agency Standard and Poor’s cut the outlook on Spain to ‘negative’ in December and warned the country faced a risk of a full debt downgrade within two years if the government did not take tough deficit action. Signs of dithering over labor reforms and austerity measures, or fears that they do not go far enough, could prompt other ratings agencies to lower their outlook for Spain.

MARKET CONTAGION

Concerns about sovereign risk in peripheral euro zone countries have spread from Greece. If there is any sign of backtracking in Greek attempts to cut its deficit, pressure could mount on Spain as well as Portugal. The risk of a country defaulting or dropping out of the euro zone seem remote, but investors will need to see firm evidence of credible austerity measures before they ease the pressure on Spanish assets.

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Factbox: Key risks to watch in Spain