Prime Minister-elect Mariano Rajoy faces the first test on Tuesday of whether markets have been reassured by his conservative party's sweeping election victory when Spain tries to sell up to 3 billion euros ($4 billion) of short-term government debt.

Investors had hoped for a clear victory for Rajoy's People's Party, which has promised tough measures to tackle the worst economic crisis in decades, but there has been little relief on the markets since his landslide victory.

Spain's borrowing costs are still close to levels that forced Greece and Portugal into an international bailout and Madrid remains at the centre of the euro zone debt maelstrom.

Investors are frustrated by a lack of detail on Rajoy's plans and he showed no sign of hurrying after his victory on Sunday, saying he will keep impatient markets and edgy Spaniards guessing until he is sworn in just before Christmas.

Signs before the auction around 0940 GMT were not encouraging with yields on the 3-month bill on the secondary market more than double those recorded at the previous primary auction last month, making short-term financing costs the highest in 14-years.

The People's Party (PP), voted in by a sweeping majority on Sunday as angry voters dumped the ruling Socialists, is not expected to take power formally until around December 20, under an agonisingly long transition required by Spanish law.

Rajoy says he will hold his first cabinet meeting on December 23, and has resisted pressure to at least give some crumbs to nervous investors on precisely what he intends to do to cut the deficit and restore market confidence.

The PP's manifesto was short on policy detail, as Rajoy sat back and relied on anger over a grinding crisis that has put one in five Spaniards out of work--the highest rate in the European Union -- to rocket him to the biggest election win in 30 years.

The need for immediate action from the new government is pressing, with Spain's bond yields at punishingly high levels, said IHS Global Insight economist Raj Badiani.


The new government plans to introduce three reforms in its first cabinet meeting to tackle these key areas, Expansion newspaper reported on Tuesday citing PP sources.

The measures will tighten budgetary limits on Spain's over-spending regional governments, force banks to acknowledge losses on toxic real estate assets on their balance sheets and speed up reform of the country's rigid labour market, the paper said.

Rajoy, offered close co-operation by German Chancellor Angela Merkel in a phone call after his victory, says he will also wait until just before Christmas to name the new economy minister.

Before the elections, he pleaded with markets to give him 'preferably more than half an hour' to get his cabinet and programme in place.

Spain is paying investors close to 7 percent interest to hold its 10-year bonds, a rate considered unsustainable over any length of time.

After Greece, Ireland and Portugal had to ask for bailouts, the escalating euro zone crisis has spread right to its centre with Italy and France's also now under pressure.

Once he does take power, unlike many of his predecessors, Rajoy will have a free hand with an absolute majority that enables him to govern without making deals with parties in Spain's autonomous regions to pass unpopular measures.

But the austerity measures he will take could make things worse before they get better as Spain slides towards the second recession in two years and the dole queues of 5 million unemployed are likely to get longer.

Many Spaniards expect renewed protests on the streets as his measures begin to bite. ($1 = 0.7425 euros)

(Additional reporting by Paul Day, writing by Barry Moody)