Risk premium comes under pressure after elections

The Spanish stock market fell sharply on Monday and the country's risk premium rose on concerns about Greece and the possibility that the loss of regions and municipalities previously held by the Socialists in Sunday's elections could lead to more debt being declared.

The blue-chip Ibex 35 index closed down 1.41 percent at 10,082.70 points. The spread between the yield on the benchmark 10-year government bond and the German equivalent widened at one point to 260 basis points before easing later. The risk premium hit a euro-era high of just under 300 basis points in November during the Irish debt crisis.

The risk premiums of other euro-zone peripheral countries also rose on persistent fears that Greece may have to restructure its debt. The rest of the European stock markets were also lower, with the Eurostoxx 50 down 2.09 percent, Frankfurt's DAX off 2.00 percent, and Paris' CAC 40 shedding 2.10 percent.

Investors are also worried that some regions and cities captured by the conservative Popular Party in the regional and municipal elections at the weekend may "uncover" more debt than previously acknowledged by outgoing Socialist administrations. This was the case with Catalonia in the northeast after the center-right nationalist CiU coalition defeated a tripartite government led by the Socialists in elections held last year.

The Socialists lost the region of Castilla-La Mancha to the PP, which has been highly critical of the government's management of the economic crisis. It alsolost the key cities of Seville to the PP and Barcelona to the CiU.

There have been concerns about the government's ability to rein in the spending of the country's regions and municipalities as part of its drive to trim the country's public deficit. The administration managed to meet its target of cutting the shortfall in its books from 11.1 percent of GDP in 2009 to 9.2 percent last year due to the efforts of the central government, whose performance offset those of other tiers of the public administration.

Through a series of austerity measures that include spending cuts and tax hikes, the government is aiming to narrow the deficit further to 6 percent this year before bringing it back within the ceiling of 3 percent by 2013 set by the European Union.

"Waste of time"

Meanwhile, the governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, on Monday said it was a "waste of time" for the government to blame the markets for the high risk premium it has to pay to sell debt.

Instead, the administration should acknowledge and address the problems it is facing, of which the main one is the country's excessively high unemployment rate, the bank chief added.

"To lay the blame [for the risk premium] on the maliciousness or greed of the markets is a waste of time, and could distract us from the fact that this cost can only be reduced if we adopt the necessary measures and internal reforms as soon as possible," Fernández Ordóñez said in a speech.

The central bank chief said the country cannot afford to be paying an excessive price to place debt for much longer as this would cause funding problems for companies and reduce lending.

Apart from "rigorously complying" with its deficit-reduction program, the government also needs to tackle obstacles to the creation of jobs. "You only have to look at the available figures, and in particular our extremely high jobless rate - 21.3 percent - to recognize that we have a serious problem of our own as a result of the weaknesses of our legal and institutional framework," he said.