Tables Turn on Spain With Pressure to Seek Bailout

Monday, 24 Sep 2012 08:47 AM

 

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Spain once pushed hard for Ireland and Portugal to ask for bailouts from their partners in the euro because it was keen to shelter itself from an accelerating sovereign debt crisis.

Now the tables are turned and Madrid is holding back from applying for help, not least because the Spanish government knows all too well what befell its Portuguese and Irish peers once they did seek help -- voters dumped them.

Facing an important regional election on October 21, Prime Minister Mariano Rajoy is in no rush to yield to nervous pleas, from France, Italy and indeed Ireland, that he request a rescue deal that might dampen investors' concerns about their own debt.

Dublin and Lisbon fought shy of EU and IMF help for long months in 2010-11, fuelling turmoil in the bond markets, in forlorn attempts to avoid a humiliating loss of sovereignty and lenders' demands that they draft unpopular budgets.

Now Rajoy, in office for nine months, is doing the reverse of what his Spanish predecessors urged on others, and insisting Madrid may not need help -- at any rate not right now.

Part of the procrastination is down to Rajoy's personality. The dour conservative Gallego from rainy northwestern Spain built his career on digging in his heels and letting everyone else wear themselves out until he decides he's ready to act.

People in Rajoy's homeland, Galicia, are renowned for being noncommittal and answering a question with a question. Meet a Gallego on the stairs, a Spanish saying goes, and it's hard to tell whether he is going up or coming down.

"Rajoy is resistant. That's his life. He prefers to take a bad decision in three months to taking a good one tomorrow," said a former government official from Rajoy's People's Party.

Such is Rajoy's poker-faced ambiguity that even longtime associates cannot tell when he will come off the fence.

This month's offer of potential support from the European Central Bank has eased Spain's borrowing costs somewhat, giving Rajoy a breathing space. Germany, whose voters dislike funding bailouts, has also made clear there should be no rush.

But tension remains, with those leaders most concerned about their own debt levels fretting that Spanish delay could unsettle markets and raise the risks they too may need some form of help.

"Spain was much in favor of moving quickly in the case of Portugal, to cut contagion," said a senior euro zone official, recalling pressure from Madrid in the months before Lisbon finally applied for a bailout program in April.

"It's clear that countries such as France and Italy would like to see a request from Spain coming soon," the official said. "But Germany, for instance, is clearly not in hurry."

CHAIN REACTION

In Portugal, domestic banks played a part in pushing a reluctant government into the arms of the IMF by disclosing that the European Central Bank had urged them not to increase their exposure to Lisbon's debt.

Spain's big banks are starting to play a similar role in pressuring Rajoy.

The government should seek precautionary credit "the sooner the better," Francisco Gonzalez, the influential chairman of giant Spanish bank BBVA, said on Thursday.

Rome and Paris reason that the sooner Spain applies for help, the smaller the damage to investor confidence in the euro zone as a whole and the greater the chance of finally breaking the chain reaction of debt crunches.

Wary of hurting Spanish pride, officials are using diplomatic language to convey the message.

"We have to respect the fact that Europe is made of 27 member states and each of them is sovereign and it is particularly true in the case of an important and proud country like Spain," French Finance Minister Pierre Moscovici said.

"But if at one stage they want something from the European Union, the tools are there," he told Reuters TV last week.

Irish Finance Minister Michael Noonan was slightly more explicit. "I'd like them to set out their position because it hasn't been clear over the summer what their position is," Noonan said ahead of a euro zone finance ministers' meeting in Cyprus on Sept 14-15.

Ireland, which Spain pressed to accept a foreign bailout in late 2010, has its own reasons to want Madrid to follow suit. It is concerned a shaky euro zone debt market will thwart Dublin's hopes of returning to the open market to raise funds next year.

A contrary logic is coming from Berlin, where the government faces an election in a year's time. With public opinion against paying to bail out other states, Germany insists the euro zone rescue funds -- the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM) -- are not mere conveniences to provide cheaper funding for governments.

For Germans, the funds are a last resort and as long as Spain can finance itself on the market and yields are relatively stable, albeit high, then using the bailout method to help Spain would be difficult to sell to the German parliament.

Austrian Finance Minister Maria Fekter made that case last week when she said: "The goal is not to get as many countries as possible under a program, but to keep them stable enough so that they do not need a program."

Investors now charge Spain more than one percentage point less in interest for 10-year bonds since the ECB said it could buy potentially unlimited quantities of short-term bonds on the secondary market.

But ECB action is conditional on a Spanish application to the euro zone bailout funds and an agreement to implement fiscal and economic reforms under strict international supervision.

Some investors are counting on Spain asking for a bailout at an EU summit on October 18-19. But several EU officials in Brussels said they expected Rajoy to wait until after a regional election in his home state of Galicia on October 21, when his party has a chance of winning a full majority in the local parliament.

To reduce the stigma of being told how to fix its economy by outsiders, Spain will present a new package of reforms later this week, as well as a budget for 2013.

This could enable Rajoy to apply for a bailout to unlock ECB bond-buying if yields start to rise again while keeping any new conditions to a minimum and reducing political embarrassment. The big question is how long the markets are prepared to wait.

As France's Moscovici said last week: "My impression is that we still have a bit of time."

© 2014 Thomson/Reuters. All rights reserved.

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