SPAIN - The plan to use Spain's Social Security Reserve Fund to invest in regional public debt should be debated by all of the country's economic players and not be influenced by political motives, Towers Watson has said.

According to the consultancy, the next election could happen as soon as November this year or at the beginning of 2012, and a potential change of government could lead to a change in strategy.

Gregorio Gil de Rozas, director at Towers Watson, told IPE: "This project should be discussed and introduced by economic players such as social partners, companies' chief executives and banks that could decide whether or not the fund can invest in local bonds."

The proposal to allow the €67bn fund to invest in local bonds arises from the Catalan centre-right party CiU at a time when Cataluña is struggling with amount of debt.

Angel Martínez-Aldama, director of the Investment and Pension Funds Association (INVERCO), said: "The socialist party, which is currently leading the government, needed to find support from other political parties to implement the reform of the pension system, which was approved yesterday. While the CiU supported the new measures, other parties rejected the reform."

"As part of the deal, the government agreed to introduce a plan to use the fund to invest in local debt, as several authorities find it particularly difficult to gain access to the primary and secondary markets, as investors are not particularly willing to invest in regional bonds."

The Spanish Ministry of Labour ignored IPE's question of whether it had struck a deal with the CiU, instead simply emailing a document outlining why it would be perfectly legal for the reserve fund to invest in regional debt.  

The Social Security Reserve Fund, which was launched in 2000 to finance Spanish pensions, currently invests 80% in Spanish national bonds and around 20% in bonds issued by other European governments such as France, Germany and the Netherlands. 

Gil de Rozas went on to say: "The use of the fund in local debt would lead to a cut in interest rates. Before the financial crisis, the level of debt was around 30% or 40% of GDP, but since then, this percentage has jumped to 60% of GDP, which is the limit imposed by the EU commission.

"As a result, investors and financial institutions have lost confidence in our solvency. This situation has led to a significant increase in interest rates."

He added: "As much as 30% of our budget for 2012 will be allocated to interests only. Our main objective now is to find solutions to attract interest from investors that will lead to a cut in interest rates.

"Clearly, the implementation of this project will depend on the debt crisis and its evolution over the next few years. If the crisis is solved rapidly, this plan will not be necessary. But, at the moment, using this fund to invest in local bonds is seen as a good way to alleviate pressure on local authorities."

Both Gil de Rozas and Martínez-Aldama agreed that the proposal would not be enough to cut local debt over the long term and that further measures would have to be implemented.