Full Transcript of CNBC's Interview with Zapatero 

MARIA BARTIROMO: When we spoke last in New York, you were able to put calm in the markets. Of course, in the last couple of weeks, we've seen once again worries and speculation over the debt crisis as a result of Ireland and the impact on Spain. Characterize where we are in the economy here in Spain.

Prime Minister JOSE LUIS RODRIGUEZ ZAPATERO: (Through translator) Well, today I've even got more arguments that I can use to really put calm back in the markets, because it's all about what's happened because of the prices in Ireland because two months, just two months ago we launched a series of major reforms. We've implemented that. Our plan to reduce our deficit is being stringently kept to. We actually managed to reform the financial institutions, opening up the cajas--the number of cajas, or savings and loan banks, from 41 to 17 very quickly, reforming the way they operate to let private capital into them. We also look today at new announcements of reduced tax floor corporations, privatizations. So all of these are actions that are designed to generate trust, generate growth. They are for financial stability, and that stability and security is guaranteed there by Spain even though we've had that aftershock that we suffered because of the Irish crisis.

BARTIROMO: You are looking at new measures to make the economy more competitive. You have announced privatizations, and you said that the regional savings and loans, the cajas, the activity in terms of consolidation, will continue. Can you categorically say that the banking system in Spain is healthy and well-capitalized?

Prime Minister ZAPATERO: (Through translator) Definitely. It's not only healthy and well-capitalized, it’s done its homework, it's still doing its homework; and, on top of that, it will be one of the most attractive financial systems for investment. It will be one of the most efficient and one of the more profitable systems. We were two or three years back, and we still have
that core strength and that ability to reform as we have to reform. And therefore, all investors need to feel reassured about that. Our system has guarantees behind it, the ability to carry out the right reforms. It has modern legislation as a framework and strength that will allow us to get to Basel III in a reasonable period of time.

BARTIROMO: When would you expect growth once again?

Prime Minister ZAPATERO: (Through translator) Well, for three quarters now, the last three quarters in Spain, the economy has been giving us some positive signs. We've had two with slight positive growth figures, two quarters in a row. And the last quarter--the last quarter recorded zero growth. In 2011, the economy of Spain will grow quite clearly. In fact, there are some reports, analysts reports from the IMF, I read one yesterday from JPMorgan, too, those reports are saying that with the implementation of the reforms that are under way now in Spain, 2011, 2012 will be years when Spain will become one of the most attractive countries for investment in the securities market. The IMF said that Spain is--could be one of the countries recording most growth, the highest growth rates in 2012 or 2013 in the whole of the European Union. And I'm absolutely convinced about that. Why I'm convinced of that is because we are undertaking a whole suite of reforms that very few countries have undertaken. It's so intensely--in such a short period of time and in the right direction. These aren't just empty words. These are facts. We've got the reform of the financial system and then you go right across to the deficit reform and the labor market reform. There's the array of reforms. They're there, and you can see them, and they will actually come up with positive results for us. The long-term view investor has to be able to see whether a country is working for the long term, and that is exactly what we are doing.

BARTIROMO: I would like to ask you more about the cajas, the regional savings and loans. From what I understand, it is the real estate on the books of these savings and loans. If you had to write down those assets, what would it be? Would it be $60 billion, $50 billion? There's a lot of talk about what the value is; and, of course, these numbers are significant.

Prime Minister ZAPATERO: (Through translator) Yes. Those figures, though, really have no basis to them, those figures that they're talking about. I should remind you that Spain is, out of the European countries, the big or the medium-sized European countries, it's the country that has had to inject less capital than anybody else into its financial system. It's been barely 1 percent of its GDP. That's 11 billion euros--less than France, less than Germany, less, of course, than the UK--in order for the financial institutions here to reach the required capital amounts.

And also, I could remind you--and sometimes the analysts or some analysts don't remember this and don't perhaps underline this point enough--the regulatory system in Spain has been the most stringent, the most demanding system out of all developed countries with the rules that are actually applied by the Bank of Spain. And that has meant that the provisions, that a
requirement on every single institution, every time there's any real estate operation, that it's a 33 percent level applied. So even though the value of the land depreciates a lot more than that in values lost, those provisions are already there, they've been put in to guarantee the health, the financial health of the banks. And that is often forgotten. People overlook that fact. We have a system of requirements imposed on banks here in Spain that is perhaps the most stringent of all developed countries in the world. Therefore, we are in a position, together with a restructuring process that is under way now, to hit the criteria of Basel III, and quite reasonably, I think.

BARTIROMO: Is it fair to say, though, that housing prices are crucial to the health of the system because we are looking at perhaps millions of homes, unsold homes, a market that is very tight. We need to see buyers and sellers in order to see the property market see volume and activity again. So is it not the case that until we get clarity on house prices, whether or not they are going to continue to fall, it is hard to quantify the scale of nonperforming assets on the banks' books?

Prime Minister ZAPATERO: (Through translator) There's another feature of our country, another characteristic of Spain and its financial system, with regard to housing, which people don't often know. It's something they're not aware of, and it's a very important fact, and that is that the NPL ratio, the nonperforming loan ratio of the payment of mortgages, families who have homes in Spain, is extremely low, even with the crisis. It's not even at 2 percent. It's very, very low as a ratio.

What does that mean? It means that families, households, defend the home that they have bought. They pay off their mortgage, even in times of crisis, with a system of assurances and guarantees that are extremely robust. Consequently, when people talk about this stock, the housing stock that's still to--here to be sold, you have to bear in mind that this is a feature, as
I've just described it, of our country and our system. The housing stock, naturally enough, will start to diminish. It has already started to diminish. It will take a certain amount of time for that to happen, of course, but that will not have an impact on the health of the financial system in Spain.

BARTIROMO: Let's talk about some of the measures that you announced in terms of raising revenue and privatizing certain assets in Spain.

Prime Minister ZAPATERO: (Through translator) Yes, you're right. Today we have announced certain measures for liberalization of the economy in two very major public sectors. First of all, management of airports in the country. We will be opening up airports to private capital investment. And the body--that will be for the body that regulates and manages all Spanish
airports, the airports authority here in Spain. We're talking about a total value of about 30 billion euros for that airports authority. We will be allowing capital investment up to 49 percent in that body and the big Spanish airports, Madrid, which is Barajas Airport, and Barcelona, which is El Prat Airport, will be managed by private enterprises. This is a magnificent investment opportunity. They're both very competitive airports, high traffic volumes going through those airports, and that will certainly mobilize and draw in investment. It will also bring Spain's debt down as we are privatizing such enormous volume with that sector.

And the other privatization will be 30 percent of the state's lottery
business. The lottery business is mainly a public sector business. It's in
the hands of the state, and it's a very profitable business. Every year, 3
billion euros in profit are made by this business. Since its outset, since it
first started, it's always made a profit. We'll be privatizing 30 percent of
that business to allow private capital to come in. And once again, it's
certainly a wonderful investment opportunity and a chance for us to bring debt
levels down.

BARTIROMO: Can this be considered long-term funding? What do you say to
those people who might say this could be a fire sale? How many more
government assets can you sell?

Prime Minister ZAPATERO: (Through translator) These are the main ones. Our
country really doesn't have a huge public sector holding businesses. We have
a highly liberalized economy, much more so than a lot of the European
countries, you know. And the transport industry, that's an extremely dynamic
sector here, highly profit-making, is the sector that right now will be
privatized. That's mainly the sector we'll be privatizing. And I'm
absolutely convinced--and of course, the lottery business, as I said. And I'm
absolutely convinced that the major investors will be very keen to come in
here because it's a big business opportunity.

BARTIROMO: Six months ago it appeared that a long-awaited wave of mergers and
acquisitions of the regional banks, the cajas, were happening, and that was
under way. But the process seems to have slowed or even come to a halt. Does
this indicate that none of these smaller banks can trust each other enough to
do the deals that some believe must happen? Why has that process slowed down?

Prime Minister ZAPATERO: (Through translator) The process hasn't slowed down.
It's important to make that point, but what happens--often happens is when
people stop talking about a subject, it's almost as if you've put it to one
side. It's not true. In record time, we have changed the legislation
governing these cajas, the Spanish savings and loans institutions in Spain
because they were, cajas, they were banks that were almost totally controlled
by the public sector; and under this change legislation, they will be opened
up to private investment and their management will change. They will have to
compete openly in the market. They will have to go out and bring in private
capital. So in record time we've also cut down the number. There was--there
was 41 before, and there's now 17. And on the 24th of December that will be
the final date of completing that process of mergers, so it's all been done in
record time. So I would--I would invite anybody to give me an example of any
other country which has been able to carry out such a major restructuring of a
financial system such as we've done with the cajas in record time or in
shorter period of time. It's been done in record time with good fundamentals,
very sound, very robust fundamentals. The restruction, as I said before, is a
process that will be completed on the 24th of December.

BARTIROMO: What about the larger banks? Some people say, `Here we are
talking about the smaller regional savings and loans, but who's funding those,
the larger banks?' So Nomura, the Japanese investment bank, says Spanish banks
need a capital injection of anywhere between 40 and 80 euros. That represents
4 to 8 percent of the Spanish GDP. Do you agree with that assessment?

Prime Minister ZAPATERO: (Through translator) No, we don't agree with that.
We don't agree with that assessment because Spain's major banks are really
considered to be amongst the best in Europe. They've--they came out of those
stress test with magnificent results. They have a very sound capital
structure, major presence, a major footprint in the world today. They've
continued to invest in it--in the midst of the crisis, they've continued to
buy up banks and their profits have been amongst the highest that have been
made by any banks in the world today, particularly the Banco Santander. It's
the soundest bank around in the midst of the financial crisis.

It's true that all European banks have suffered somewhat. They've found it
tough to actually get funding on wholesale markets and once sort of the fears
have died down, been dissipated, well, the ability to get funding has repeat
again, but extremely sound. I've said it before and I'll say it again, you
know, we want to be one of the very first countries to ensure that we meet
requirements in demands of the Basel III Accord and to be able to keep up, as
we have done up to now, one of the most competitive and demanding financial
systems that we have, with the highest quality.

BARTIROMO: And you're confident this is the case without the ECB support,
Jean-Claude Trichet said do not underestimate the determination of Europe to
resolve the current crisis. But there are rumors, of course, that he could
signal this week that the ECB is about to begin the process of removing
non-standard support for the eurozone banks. As Spanish banks have been one
of the biggest beneficiaries of ECB support, does this worry you? Do you
worry that the banks may not be able to survive as well without the ECB

Prime Minister ZAPATERO: (Through translator) You see, Spanish banks over the
last few months have really reduced their recourse to the European Central
Bank because, fortunately, they've been able to get funding on the wholesale
market, the interbank market, which is really the way things should be
working. It's the normal way things are done in the banking system. Let's
hope that this interlude, this episode that we have had to go through, the
uncertainty and the concerns in the market with so much volatility,
particularly in the wake of the Irish crisis, we'll be left behind very
quickly and will not force out banks to raise their recourse to the ECB. But,
actually, that's why it's there, isn't it? But let's hope that we won't have
to increase again our recourse to the ECB.

BARTIROMO: You have talked about running Spain almost like a business. you
are trying to attract foreign capital to the country. Have you spoken to the
sovereign wealth funds in Asia, in the Middle East, in Russia? What has been
the reception?

Prime Minister ZAPATERO: (Through translator) The message is a very clear
message, you see. Spain is a country which has recorded huge economic growth
over the last 15 years. It's a country which is going through a crisis
because of the financial system crisis and the real estate bubble bursting,
but we are undergoing reform. We're quite resolute about this. We're
actually getting the country back into order, putting things in order so the
economy works even better than before and for economic growth to take off

With the high unemployment rate we have now, which is our main problem, we
need two things. We need to export, to export more. We want the world--we
need the world to buy more products that are made by Spanish companies that
are very good products. And for that to happen, we need to be competitive and
we have to attract investment. That investment can be attracted here because
the conditions that will be on offer here will be conditions of profitability,
good returns, and there'll be the right framework here, the right fiscal
framework here for investment to take place. That's why we are reducing the
tax on corporations. We have a flexible framework with the new reforms, the
labor reforms. We have a good flexible administrative framework. We're
getting a rid of all that red tape. We're privatizing, that's why we
have--are moving into these new privatizations. And all of these factors are
positive points, they're plus points for traction of investment. That's what
we're doing, and that's what we're trying to explain to everyone where, of
course, there is the ability and the strength to invest--the West, of course,
Asia, the gulf countries, the big investment hubs in the world today.

BARTIROMO: So do you expect that we will see sovereign west--sovereign wealth
funds coming to Spain? I mean, we know that the Greeks are in China. Ireland
looking toward the sovereigns as well. Is Spain doing it, and do you look
towards the surplus nations? Does this become even more of an immediate issue
right now?

Prime Minister ZAPATERO: (Through translator) Yes. Yes, we do need that
foreign investment. Spain is a country that has always had a lot of foreign
investment over the last 15 years, a lot of North American investment, foreign
investment that we're very grateful for. And we would like to continue to
have that investment, but now, yes, we do have to widen our horizons to Asia
and the gulf countries. They are the countries we'd like to bring investment
from, from private funds, from sovereign wealth funds, for our forward-looking
future sectors, such as transport, renewable energies, the agri-business, the
financial system here. There is a wide array of possibilities for investment
in Spain.

BARTIROMO: What are you hearing from Germany? Angela Merkel appears to be
forcing ever more stringent conditions on those being bailed out, of course.
Do you feel you can rely on the support of Germany and, say, France if you had
to tap the EU fund?

Prime Minister ZAPATERO: (Through translator) Spain isn't going to have to
tap any EU fund or resort to them. Remember, actually Spain is helping
Greece, and it did help Greece and is now helping Ireland. Our risk in Greece
and Ireland is a small one. The big countries in Europe, such as Germany,
obviously, has a greater risk exposure in the case of its banks. And we are
helping along with everybody else. The European Union, you see, has to be a
project on the basis of solidarity, co-responsibility, and harmonization of

It's quite obvious that Germany has its own interests. Germany had its own
reform process back in 2000 and subsequent years. Germany is a country that
actually exceeded the requirements, the thresholds of the stability and growth
pact when the economy wasn't doing that well then. Its deficit was too high.
Spain hadn't reached those deficit levels then, it hadn't until now. We've
always tried to strike that balance. Germany is the leading economic power.
Germany wants rigorous framework for the euro and for the economy here in
Europe, and we agree with that rigor that it wishes to achieve, and we also
agree that the only way to get that is by strengthening economic governance in
Europe. If there is this common economic governance, that is the reform
process that we are witnessing in Europe now, and we're taking steps towards
that common governance position. Now, of course, we're very much involved in
discussing the bailout of those countries that may be running into problems in
the eurozone and what would happen if that went ahead? What would be the
rules? Would private capital be involved? If so, is any restructuring to go
ahead if a country needs to be bailed out? And this is what has really
sparked an ease in the markets. That is why we're suffering from almost this
aftershock now. We have to dissipate this.

BARTIROMO: This is a very important point. And, I guess, going forward, the
corporate governing structure should change given the fact that you are seeing
these stronger countries aid the weaker countries. So where does Spain fit in,
in the new corporate governance of Europe?

Prime Minister ZAPATERO: (Through translator) What Spain advocates is that if
we have a single currency, it's not enough just to have a central bank, a
single central bank. It's not enough to have a single monetary policy. We
also need to have a common economic policy. We need to have a much more
integrated fiscal policy, which is common policy, in order for our competitive
positions to converge much more to become a pillar underpinning our single

The euro is a historical project. It is a unique project really. You're
talking about 16 countries operating with the currency. We've completed the
very first phase of construction of the euro system. It's been extremely
positive for all of us. Now we are facing a very severe test, and it's up to
the European governments, the European leaders, and the European institutions.
It's our job now to put up those pieces of scaffolding, the pillars in place
to insure that the euro can actually successfully get through this first phase
and come out of the first phase stronger.

That is--that is the issue facing the eurozone now. And the markets have been
looking on, watching it. They're watching every single step we take. They're
listening to every single statement that is made. And I would say to you that
Germany and Spain are key countries because of what they represent and because
of the position that we're in right now. And I'm absolutely convinced that
both Spain and Germany are going to do things rigorously, properly, in a
forward-looking way to insure that we can put the insurances for the eurozone,
and that will make a contribution to stability in the world as a whole.

BARTIROMO: You mentioned private capital. Where do you stand on protecting
the senior bond holders? You have investors watching. Can you guarantee that
no private investor holding Spanish government debt will have to take a
dreaded haircut?

Prime Minister ZAPATERO: (Through translator) Absolutely, yes. It's been a
tradition of Spain's public debt, our treasury bonds, our treasury, I think,
is one of the top rated treasuries in the world today. And we're going to
keep that above and beyond everything else. And let me remind you that our
public debt is relatively low. It's close to 60 percent right now, 20 points
below the average in the eurozone, both before the crisis, in the crisis. Now
it's 20 percentage points below France and Germany, you see. So Spain's debt
is very strong. There's a strength there despite what anybody says. No
matter they say, that's the way things are. And the good investors, those
investors that have always worked with us, with Spain's public debt, know
that. And that is the guarantee of the Spanish government beyond any

BARTIROMO: Let me ask you about labor reform, which of course is the other
issue that everyone is talking about. You have 20 percent unemployment, 40
percent unemployment when you look at young people. How will you dig out of
this? What is the plan to reverse the trend?

Prime Minister ZAPATERO: (Through translator) Yes, this is the big problem
that we have to deal with. And it's going to be the toughest task for us,
speaking frankly. In 2007, it's true that we recorded the lowest unemployment
rate that Spain had ever had. We've always had slightly higher rate than the
average in Europe, but it was 8 percent. It was down to 8 percent in 2007.
And now--and I wanted to say that because people aren't aware of that fact
that Spain's working population has grown more than any other country because,
in a period of just 10 years, almost five million people have come to Spain to
work. The population of Spain is 46 million today, and of those, we have been
able to attract and bring in workers from Latin America, from North Africa.
And a lot of them have come in to work in the real estate sector.

With the real estate bubble, when it burst, what happened was that the
unemployment rate rose quite sharply. What are we doing to make sure those
people can get jobs again? First of all, we are going to implement our labor
reform, which will provide more flexibility for companies with regard to
hiring workers. It will make it easier for them to adapt their business to
the economic cycle, to make--to create a coupling or a linkage between wages
and productivity.

And then we're also, lastly and also importantly, improving our policies on
training and skilling and reskilling, so that the people who have been working
in the real estate sector and who won't be able to go back to work in that
sector, they know that. And we have to state that quite clearly. But they
will be able to go into the new emerging sectors that are creating jobs today.
There are sectors in Spain's economy today where there are jobs being created.
Renewable energies is one of them. All of those sectors linked to the green
economy, sectors linked to technologies, biotechnology, they're all creating
employment. What we have to do is broaden the spectrum of those new emerging,
competitive industries so that, slowly but surely, little by little--it will
be a slow process--they can generate more jobs.

BARTIROMO: Do you have the support of the labor unions? Do they understand
what needs to be done and are they supporting the austerity measures?

Prime Minister ZAPATERO: (Through translator) Well, trade unions haven't
supported the labor reform. It's difficult for them to support that extra
inflexibility. But generally speaking, broadly speaking, going beyond that
point of the labor reform, I would say that trade unions here in Spain are
responsible trade unions. And in most of the major issues with an impact on
the economy, and in big companies, as well, they do know how to give their
support. Not always, but certainly in most of those major issues for the
future economy of the country.

BARTIROMO: Do you have the support politically, the political will? Do you
hear support from the conservative party? Do they know what needs to be done
and are they giving you the right messages that they will support you on this?

Prime Minister ZAPATERO: (Through translator) This is a pivotal issue, isn't
it? The government here has sufficient majority in parliament, as we have
shown in the past, to be able to move forward with all our reform. We've got
to improve along labor reform on budget, and there are other issues to that
standing. We would like very much to get support for our reforms from the
conservative party, the People's Party, the Partido Popular, in Spain. It
would be very good, I think, to build up trust in Spain, and I'm working hard
for that to happen. But often what happens, they just haven't the courage to
do that. Because these are reasonable reforms that everybody is asking for,
and when we announce them and publish them, people support them, the experts
support them. And I hope and trust that they will give us support. But up
till now--well, yes, it's true, they did actually support the reform on the
financial system. But, for a lot of them, they just haven't been courageous
enough to support us because they really are just mixing up politics with the
needs of the country.

BARTIROMO: What about pensions and unemployment benefits? Workers are
getting benefits for life and staying home. Why would you work if you're
getting the benefits if you can be home? Can the country afford this anymore?

Prime Minister ZAPATERO: (Through translator) Let me qualify that.
Unemployment benefit is for a defined period of time here in Spain. On
average an unemployment benefit is paid out for a year or perhaps 18 months in
total. It's a temporary benefit that workers are given. And it also is very
much linked to how long they've been working before that. But it is true that
unemployment protection level is high. We have around three million workers
here in Spain that are being given this unemployment benefit, this protection.

The reform of the pension system is a different matter. It's a necessary
reform. It's a reform which is for the long term. It's for the future. But
those countries that undertake long-term reforms are the countries that get
things right. We are going to reform the pension system so that we will phase
in an increase in the actual age of retirement because we are living ever
longer, aren't we? And as you would imagine, quite naturally, in two decades'
time, the expenditure on pensions will be much higher in Spain. Today the
percentage of our GDP that is spent on pension is one of the lowest figures in
the whole of the European union, but we do know that looking ahead to 10 years
into the future, 20 years in the future, that cost will increase enormously.
That's why we do have to undertake this reform. That is the big issue that we
will be moving into as we kick off the next year, 2011, the reform of
pensions, and we will undertake that reform.

BARTIROMO: During this crisis, of course, speculators have been making bets
on which country is going to prosper and which is under pressure. Your
government has talked about market conspiracies, singling out short sellers,
hedge fund managers. How significant is this?

Prime Minister ZAPATERO: (Through translator) I think a lot of the people
even expect experts who may be hearing this and seeing this and know that this
is a world that is terribly complex and difficult to understand, really get to
grips with. What we do know is that in certain circumstances, those who are
controlling the funds--controlling the funds for the investment decide to take
up short positions. They decide to short the investment. Why? To make a lot
of money very quickly. They decide to sell securities from a given country
and make things difficult.

Every investor and every hedge fund decide on their own what they do, of
course. But I think the only thing I can say and should say here is that
every time they do that, the funds that do that or the hedge funds that do
that, in the case of Spain, they should sit and think about it a little more
calmly because Spain is a long-term country. We have a long history behind us
and a long future ahead. We're working for the long-term future. We're an
attractive country in the long term. And, consequently, if they're going to
think about their profitability, their returns, their yields, they should take
up much more long-term positions than those short positions. This isn't a
tip. It's not a piece of advice. It's an assertion. It's a personal
conviction that I have. And we will prove this.