Spain
inches towards a full EU bailout
Spanish
Prime Minister Mariano Rajoy inched closer on Friday to asking for an
EU bailout for his country, but said he needed first to know what
conditions would be attached and what form the rescue would take
3
August, 2012
His
comments, at his first post-cabinet meeting news conference since
taking office last December, came a day after the European Central
Bank signaled it was preparing to buy Spanish and Italian bonds but
only after EU bailout funds were triggered and countries had asked
for help.
A
source said separately that Spain would not decide whether to apply
for several weeks.
Buying
bonds and providing aid would all be designed to bring down what have
been prohibitive borrowing costs in the indebted countries.
Rajoy
said he was ready to do what is best for Spain, going far further
than he did on Thursday when, during a press appearance with Italian
Prime Minister Mario Monti, Rajoy three times declined to say whether
he would seek the aid.
"I
will do, as I always do, what I believe to be in the best interest of
the Spanish people," Rajoy said on Friday.
"We
still don't know what these measures are," he said, reference to
a comment by ECB President Mario Draghi that the bank was examining
non-conventional measures to defend the euro.
"What
I want to know is what these measures are, what they mean and whether
they are appropriate and, in light of the circumstances, we will make
a decision, but I have still not taken any decision," he said.
A
source familiar with Rajoy's thinking confirmed this possibility was
actively looked at and that Rajoy was ready to bear the political
cost of a request.
In
a letter to Herman Van Rompuy on Friday, Rajoy urged the president of
the European Council to work towards creating a euro zone-wide
banking and fiscal union as soon as possible.
He
said he believed that the outline for a single supervisory system for
the banking sector should be ready before the end of this year.
Rajoy
added he believed granting the European Stability Mechanism (ESM),
the permanent bailout fund, a banking license that would allow it to
tap almost unlimited funds from the European Central Bank (ECB)
ECB
President Mario Draghi on Thursday said the fund was barred by
European law from tapping the central bank for funding.
"In
any case, whatever mechanism is put into place should be an umbrella
mechanism, one that is applied equally to all the countries that meet
its requirements," Rajoy said in the letter.
Spain
has already asked for aid for its stricken banks.
"People
have said the main reason why he is not seeking help is because he is
too proud. But this is not true. He requested an assistance for the
banks because it was the adequate instrument to solve a specific
problem. There is no opposition to do it again," the source
said.
An
aid request would entail negotiating a memorandum of understanding
with other euro zone countries and would likely bear strong
conditionality, something Rajoy wants to discuss in detail before
moving forward.
TOUGH
CONDITIONS
Although
Spain already complies with stringent EU and International Monetary
Fund demands to reform its economy and has announced a package of 65
billion euros ($79 billion) of tax hikes and spending cuts in July,
the government fears it could now be asked to reform further the
pension system.
The
measure is the last campaign pledge Rajoy has not been forced to
break so far and could undermine even more the support for the
government after it already fell sharply in recent weeks as hundreds
of thousands of Spaniards took the streets to protests against
austerity steps.
A
euro zone official told Reuters last week Spain had for the first
time conceded at a meeting between Economy Minister Luis de Guindos
and his German counterpart Wolfgang Schaeuble it might need a full
bailout worth 300 billion euros if its borrowing costs remain
unsustainably high.
Rajoy's
office however denied that talks on this issue had taken place.
People
who discussed the question with Rajoy explain that he may still hope
to avoid making the request because he thinks by just knowing that
the EU rescue funds and the ECB are geared up would be enough to
shield Spain from market pressures.
"The
thinking is that the instruments need to be in place and possibly the
risk premium will go down so much that there will be no need to go
any further," said one senior politician.
"BAILOUT
INEVITABLE"
The
indebtedness of Spain's banks and regions, along with a shrinking
economy, set to be in recession until well into next year, have all
pushed debt costs to new record highs.
Last
week, its 10-year paper was trading at around 7.6 percent, a level
seen unsustainable in the medium term.
The
yield went down by more than 100 basis points after the ECB's Draghi
said he would do whatever is necessary to defend the euro but picked
up on Thursday as markets were disappointed by the lack of immediate
action.
"Prior
to today, the markets hoped a full Spanish bailout would not be
necessary, now they have been told it is inevitable," Marchel
Alexandrovich, senior vice-president and European financial economist
at Jefferies, said in a note. echoing the views of many other
analysts.
"The
killer Q&A Draghi statement is that before the ECB comes in to
buy Spain and Italy, first, a country need to ask for formal
assistance. So there we go, what Draghi has basically indicated is
that the problem in the bond markets has to get considerably worse
before the ECB steps in to help."
The
country's fiscal position remains however manageable for some time.
It needs to issue another estimated 35 billion euros this year to
finance its deficit and repay its debts. Its average borrowing costs
have so far remained under control thanks to cheap ECB loans to banks
earlier this year.
It
had paid an average of 3.43 percent to finance its debt in 2012, in
line with costs registered since the launch of the euro in 1999 and
below the 3.9 percent it had paid at the same period last year.
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