(Reuters) - Spain is considering freezing pensions and speeding up a planned
rise in the retirement age as it races to cut spending and meet conditions of an
expected international sovereign aid package, sources with knowledge of the
matter said.
The pension measures would save at least 4 billion euros a year as well as
fulfill European Union policy recommendations issued in May which senior euro
zone sources said were being used as a blueprint for the terms of a sovereign
aid program.
The accelerated raising of the retirement age to 67 from 65, currently
scheduled to take place over 15 years, is a done deal, the sources said. The
elimination of an inflation-linked annual pension hike is still being
considered.
Spain is hesitating to apply for external aid to handle a high public deficit
and soaring debt. Its borrowing costs fell on Thursday at an auction of a
10-year benchmark bond but relief may be short-lived.
The new pensions steps, which could be announced as soon as next week along
with the 2013 budget, would send a strong signal to investors that Spain is
serious about implementing structural reforms it has delayed because of the
political cost.
Prime Minister Mariano Rajoy, who was forced earlier this year to break
campaign pledges such as not raising taxes, has repeatedly said he would not
touch pensions, but he has few options left to trim the budget after drastic
cost cuts.
He toned down his language last week and said it would be "the last thing" he
would do.
Deputy Prime Minister Soraya Saenz de Santamaria on Friday denied the
government was studying stopping periodic pension rises.
"The prime minister has said publicly that the first thing he did when taking
power was bring pensions up to date and that should be respected ... in his
exact words, it would be the last thing he would touch," she told reporters
after a weekly cabinet meeting.
Sources with knowledge of the government's thinking said Rajoy's comments
were a sign that his stance was shifting.
"He just said that he would not cut the pensions. But did you hear anything
else? We both know that there are several ways of cutting. One is to simply
leave them steady against inflation," said one of the sources.
A second source said the acceleration in the change in the retirement age was
backed by the government while a third source, who discussed the issue with
senior Spanish officials, said a freeze was expected.
"Not increasing them is also an adjustment," the third source said.
FREEZE
Many economists also believe a freeze is inevitable.
The 2012 budget earmarks a rise in pension spending of 3.2 percent, including
a 1 percent inflation-linked review, but inflation is running close to 3
percent, meaning an extra 4 billion euros would be paid to pensioners in January
but booked to the 2012 budget.
So cancelling this year's inflation-linked raise would save the government
between 5 and 6 billion euros.
For following years, based on annual inflation of 2 percent, the reference
used by the European Central Bank to set its main rates, the adjustment would
cost 4 billion euros.
"There is no way around it. You have to cut the link with inflation and
freeze the pensions next year," said Jose Carlos Diez, chief economist at
Intermoney brokerage in Madrid.
"And to me, that would be just a start... The pensions, the unemployment
benefits and the borrowing costs are eating up all the efforts on the spending
side so you need to act in those areas," he added.
Both removing the inflation adjustment and accelerating the retirement age
increase are long-standing European Union demands and any bond-buying program to
help Spain finance its debt would insist on this, senior euro zone sources
said.
Countries which were previously rescued, such as Greece, Ireland and Portugal
all had to pass steep cuts on pensions.
In Greece, the cuts ranged from 20 percent to 40 percent, while new
pensioners had a 10 percent pay cut in Ireland and Portugal scrapped the
Christmas and summer extra payments.
SUSTAINABILITY
While an announcement could be made next week when the government adopts the
first draft of the 2013 budget, political analysts say Rajoy may be tempted to
wait until after a regional election in his native Galicia.
The timing of any request for European aid is in Rajoy's hands. Some pointers
suggest he could make the move along with the budget package to pre-empt a
credit review by ratings agency Moody's, due by end-September, which might
otherwise downgrade Spanish debt to junk status. Moody's has said it would
welcome a Spanish aid request.
However in Brussels, EU officials close to the discussion said they did not
expect Madrid to seek an assistance program before the October 21 regional vote.
That would mean Spain would have to get over a 30 billion euro refinancing hump
at the end of October, including 9 billion euros in short-term paper, without
the euro zone rescue fund or the ECB buying its bonds.
The spread between Spanish and German benchmark 10-year bonds, a measurement
of the perceived risk of investing in Spain, widened a few basis points on
Friday to 417.
As Reuters reported first last month, Spanish officials led by Economy
Minister Luis de Guindos have been talking discreetly to the European Commission
since at least early August about possible conditions and supervision for a
precautionary program that would keep Spain in the capital markets.
De Guindos made clear at a meeting of euro zone finance ministers in Cyprus
last weekend that Spain, keen to avoid having terms imposed from outside, would
announce its own reform measures and timetable on September 28, a day after a
draft 2013 budget is approved by the cabinet.
Rajoy performed especially well among pensioners when he was elected in a
landslide last year and his first move after taking office was to restore the
inflation adjustment his predecessor Jose Luis Rodriguez Zapatero had removed in
May 2010 because of the euro zone debt crisis.
Zapatero also passed a law last year to add two years to the retirement age
by 2027. Rajoy's People's party, then in the opposition, voted against the
change.
With unemployment soon to top 25 percent and set to remain at high levels
until at least 2015, the number of people contributing to the state pension
system has fallen to its lowest in 10 years. There are now 2.39 workers
supporting one pensioner.
The government tapped 4.4 billion euros from an insurance fund to make July
and August payments to the 8.1. million pensioners, about a fifth of the
population.
It also said it could not rule out using the pension guarantee fund -- meant
only for emergencies -- by the end of the year to pay the pensioners their
monthly cheque.
(Additional reporting by Luke Baker and Paul Taylor in Brussels; Editing by
Fiona Ortiz, Philippa Fletcher, Paul Taylor and Giles Elgood)
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