Spain will raise retirement age after bank recapitalization fails lower borrowing costs

Spanish Prime Minister Zapatero - Tough Road Ahead

Spanish Prime Minister Zapatero – Tough Road Ahead

The Spanish government is set to raise the retirement age to 67 years from the existing 65 years in a fresh effort to restore investor confidence after the recent €20 billion move to recapitalize the savings banks failed to lower the country’s borrowing costs.

Prime Minister Jose Luis Rodriguez Zapatero’s Socialist government is set to approve the bill today; four months after Spanish workers had disrupted broadcasts and transports in a general strike to pare the plan.

Europe’s debt crisis has added to the urgency while record jobless rate of 20 percent has resulted in high social-security cost that’s eating into the country’s surplus.

Olaf Penninga – who manages €147 billion at Robeco Group in Rotterdam, said: “It will be hard to convince everybody with something that has such a long horizon as the pension plan”. Adding that “It’s good they’re doing it but it’s not the silver bullet” and “for now the pressure will remain on Spain”, doubting if a piecemeal approach will help.

Ten Year Spanish bond yields have risen by 229 basis points more than comparable German securities, up from 225 points recorded on Jan 26 and from 209 points since Jan 24, when Finance Minister Elena Salgado announced plans to recapitalize savings banks.

The government has pledged to approve the bill in parliament today as it struggles to narrow down its deficit to 6 percent from 9 percent recorded in 2010. Spain spent almost 10 percent of GDP or €95.7 billion in contributions based pensions in 2010 and nearly forty percent of the nation’s social security bill as the country struggles with Europe’s highest jobless rate.

In 2010, contribution based pension benefits and employee’s contribution towards social security turned negative even as the system posted a 0.2 percent surplus of GDP, helped by interest earned on a reserve fund of €60 billion.

Professor Javier Diaz-Gimenez of IESE Business School – who has written extensively on state pension deficits, said the current shortfall arrived 5 years earlier than estimated. If long term measures are not taken, the debt required to fund the pension deficit will be around 190 percent of GDP, he estimates.

“Small, gradual changes in the Spanish system do not solve the problem; it’ll be disappointing because they won’t announce a fundamental reform”, he said.

The government has taken some tough measures after the Greek crisis and certain changes in the wage-bargaining law are in the pipeline.

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