Spanish Prime Minister Jose Luis Rodriguez Zapatero is beating his Portuguese counterpart Jose Socrates as they battle to convince investors they can stem the debt crisis and restore economic growth.

The extra yield investors demand to own Portuguese 10-year bonds rather than Spanish securities has climbed this year, approaching levels reached just prior to Ireland’s November bailout. It cost a record 215 basis points more this week to insure against Portugal defaulting than its Iberian neighbor.

Zapatero adopted austerity earlier than Socrates. In a U- turn, he embraced public-wage cuts six months before Socrates did, raised the retirement age, made it cheaper to fire workers and forced lenders to hold more capital. Portugal, whose central government deficit widened for the first 10 months of last year, denies it needs aid as borrowing costs near a euro-era record.

“It seems that the adjustments the Spanish government has made and the tighter rules they are applying to the banks are having a convincing effect on investors,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Spain is getting the benefit of the doubt and is increasingly being perceived as a turnaround story, while Portugal is seen as a target for the rescue fund.”

The yield spread between Spanish 10-year bonds and their German counterparts has narrowed 26 basis points since Dec. 31 to 223 basis points today, while Portugal pays 73 basis points more relative to bunds than at the end of 2010.Bond trading signals that while Portugal is struggling to convince investors it won’t need to turn to the 440 billion-euro ($606 billion) European Financial Stability Facility rescue fund, Spain is seen at less risk of collapse.

Spanish bonds are “certainly getting better” as a potential investment, Andrew Bosomworth, a money manager at Pacific Investment Management Co., said in an interview on Bloomberg Television’s “On the Move” with Francine Lacqua on Feb. 21. “Real economic progress and healing is starting to take place,” he said. Pimco manages the world’s largest bond fund.

Zapatero announced additional measures today aimed at tackling the 20 percent unemployment rate, telling Parliament the government will step up vocational training in schools. The prime minister, who has pledged to change rules on wage- bargaining by the end of next month, also said the nation has to improve its competitiveness. 

Source: Kyero