Spain approves labor market reforms as borrowing costs soar amid investor worries

Troubled Spain hastens labor reforms

MADRID — Spain embarked on shaking up its economy Wednesday with labor market reforms designed to encourage companies to hire, enacting long-awaited structural changes as it struggles to reassure markets and investors who are worried over its public finances and pushing Spanish borrowing costs to new highs.

The package of labor market changes won approval at a rare midweek Cabinet meeting, allowing Prime Minister Jose Luis Rodriguez Zapatero to take it with him to an EU summit Thursday in Brussels and show the bloc he is acting resolutely to deal with Spain’s part of a crisis that has dragged down the euro.

The reforms take effect almost immediately but eventually need Parliament’s approval, which is not a given.

Deputy Prime Minister Maria Teresa Fernandez de la Vega denied the latest in a series of media reports that the country is headed for some kind of bailout.

Spain has only just crawled out of nearly two years of recession after a boom fueled by construction and flee-flowing credit, and its public coffers have been drained by spending to cope with a jobless rate that now stands at a euro zone high of 20 percent and economic stimulus measures.

It is under intense pressure to slash a deficit that has ballooned with that expenditure and raised fears of a Greek-style debt meltdown, and desperately needs to get its 4.6 million unemployed working and paying taxes. Greece ultimately needed a bailout after being frozen out of credit markets by prohibitive high interest rates.

Elsewhere in the troubled euro zone, France announced it will raise the retirement age from 60 to 62 in 2018 in an effort to get the country’s spiraling public finances under control.

French Labor Minister Eric Woerth called the measure — already strongly opposed by the opposition Socialist Party and labor unions — a “real moral obligation,” given France’s burgeoning deficit and its aging population, which he said threatens the viability of the money-losing pension system.

The Spanish labor market reforms — long urged by the IMF and other international institutions — are supposed to shake up hiring and firing rules that Spanish companies complain discourage them from taking on workers. For instance, Spanish workers who are laid off get severance pay of up to 45 days per year worked — one of the sweetest such deals in Europe.

The reforms lower that to 33 days for almost all contracts signed from now on, although existing 45-day ones remain in force. In another change, the government will foot part of the bill when companies make severance payments after layoffs.

In a nod to unions, it will now be more expensive for companies to give workers temporary contracts of as little as a few months — the arrangement held by a full third of the Spanish work force. Most of the people who lost their jobs in Spain’s slice of the global recession had these so-called “garbage contracts.”

Unions and Spain’s main business federation had been negotiating reforms intermittently for two years until the talks collapsed last week. The government stepped in with its own plan.

“This is a necessary labor reform, one that looks to the future, the most important in the last 20 years,” Fernandez de la Vega said of the entire package.

She described as “absolutely false” what she described as rumors that Spain is headed for outside help. The business daily El Economista said the IMF, the European Union and the US Treasury are preparing a package for Spain that includes a euro250 billion credit line.

She said this and similar reports this week “do not benefit anybody except speculators.”

Fernandez de la Vega spoke as Spain’s borrowing costs soared amid worries over the government’s finances and financial problems for banks.

The interest rate gap, or spread, between 10-year Spanish bonds compared to their benchmark German equivalent rose by more than 0.10 percentage point to 2.24 percentage points. A growing gap indicates investors think Spain’s debt is getting riskier.

On Tuesday the European Union warned Spain it would have to enact more austerity measures to meet its deficit-reduction goals: cutting it from 11.2 percent of gross domestic product last year to 3 percent in 2013.

Markets are also worried about Spain’s banking system. Deputy Finance Minister Carlos Ocana acknowledged this week that Spanish banks are having trouble obtaining credit on the interbank market. “The situation is a problem,” he said Monday at a business conference.

The chairman of the country’s second largest bank BBVA, Francisco Gonzalez, put it in even blunter terms.

“Financial markets have withdrawn their confidence in our country,” Gonzalez said. “For most Spanish companies and entities, international capital markets are closed.”

Spain faces a key test Thursday with an auction of 10- and 30-year Treasury bonds.

On Tuesday it raised euro5.1 billion in an auction of 1-year and 18-month bills but paid a premium through higher interest rates. The auctions were oversubscribed 1.5 and 3.5 times respectively, showing that investors still have an appetite for Spanish debt but demand a bigger return for taking it on.