Spain says unions, management failed to agree on labor reforms, gov’t to propose own plan

Spanish reform talks fail, borrowing costs rise

MADRID — Spanish unions and employers failed to agree on labor market reforms deemed crucial for resurrecting the economy and allaying jitters over its public finances, the government said Thursday as wary investors again sent its borrowing costs soaring.

The failure of the 11-hour negotiation that broke up just before dawn means the government will now propose its own plan for changing the rules that govern Spain’s labor market.

The negotiations were aimed at creating consensus on reforms to encourage companies to hire, resurrect an economy saddled with a 20 percent jobless rate and reassure markets that Spain can trim its heavy deficit and debt loads.

Spain’s labor laws have been widely criticized as rigid and discouraging companies from taking on workers. For instance, Spanish workers who are laid off get severance pay of as much 45 days per year worked, among the highest levels in Europe.

The government will meet separately Friday with the unions and employer groups to present its own reform plans before approving on June 16 a decree, which would need Parliamentary approval.

The Labor Ministry refused to detail what the government’s labor market reforms entailed.

Its announcement came as Spain’s borrowing costs rose dramatically in its first debt auction since the Fitch agency downgraded its credit rating last month.

The Treasury auctioned euro3.903 billion ($4.69 billion) in 3-year bonds at an interest rate of 3.394 percent. That marked an increase of 1.36 percentage points since the last auction of this class of debt on April 8. It was also the highest level for this bond since November 2008. Thursday’s auction was 2.11 times oversubscribed, the Treasury said.

The higher interest rates reflect investors’ worries that Spain might have trouble trimming its oversized budget deficit and could eventually struggle to raise money to finance its operations, as did Greece, which ultimately needed a bailout from the EU and the IMF.

Fitch downgraded Spain’s sovereign debt from AAA to AA+ on May 28, saying austerity measures taken by the Socialist government will slow growth in the Spanish economy. It was Spain’s second such downgrade in a month, after Standard & Poor’s took a similar move.

Furthermore, the spread between Spanish 10-year bonds and their benchmark German equivalents has been soaring for weeks. It stood at 195 basis points at midday Thursday. As recently as April, the spread was as low as 100 basis points.

The figure is a key indicator of how risky markets think Spain is. The bigger the spread, the less confidence in Spain’s government finances.

Prime Minister Jose Luis Rodriguez Zapatero leads a minority government that relies on smaller, regional allies to get bills passed, and he will need their help — or at least abstention — to get labor reforms passed.

The package he will submit is called a decree because lawmakers can only vote yes or no, not introduce amendents.

Most opposition parties are livid with Zapatero over his handling of Spain’s economic crisis and staggering jobless rate, which goes up to 40 percent among Spaniards under age 25. Last month his euro15 billion ($18 billion) austerity package calling for cuts in civil servants’ wages and a freeze on pensions passed by just one vote, and even then only because several parties abstained from voting at all.

One Catalan nationalist party said Zapatero was finished as prime minister and should call early elections, and that it was abstaining only so the package would pass and spare Spain from falling off a cliff like Greece did.

Spanish businesses complain that severance packages are so costly that it discourages them from hiring people and giving them open-ended contracts with full benefits.

Consequently, a third of the Spanish work force has temporary contracts that provide for few benefits and little severance. When the economy tanked, veritable armies of this class of worker were laid off.

With unions opposed to lowering severance protection and businesses demanding it, the government opted for a middle of the road approach, the newspaper El Pais reported Thursday.

Severance deals of up to 45 days per year worked will remain, but the government will pay a part of these packages — 8 of the 45 days — so long as the layoffs are ordered because a company is in economic straits, the paper said, quoting a draft of the government proposal, which also seeks to extend use of another, existing kind of contract with just 33 days of severance.