Spain digs in its heels over ECB's bailout

conditions
More eurozone jitters as Mariano Rajoy stands firm against Greek-style rescue
Julian Knight
Wednesday, 12 September 2012
The Spanish Prime Minister sparked concern across the eurozone yesterday after
apparently ruling out a Greek-style bailout that would force Madrid to make specific
budget cuts.
Mariano Rajoy's resistance could stand in the way of a much-anticipated rescue of the
country, which is struggling to bring its finances under control. After facing eye-watering
borrowing costs over the summer, Spain is seen as a prime candidate for assistance under
the European Central Bank's new bond-buying scheme, which is meant to bring down the
punitive interest rates faced by debt-laden countries in southern Europe.
But the scheme unveiled by the ECB President Mario Draghi would first force Spain to
apply to one of Europe's bailout funds something that could force Madrid to implement
specific spending policies. "I will look at the conditions. I would not like and I could not
accept being told which were the concrete policies where we had to cut," Mr Rajoy told
Spanish television in his first interview since taking power in December.
He said he had not yet decided if the ECB scheme to buy short-term bonds was
"necessary or convenient".
The country's generous state pension appears to be one key area that the PM is unwilling
to cut. "The first instruction I gave to the Finance Minister who is drawing up the budget
is that the people it shouldn't affect are the pensioners," he said.
The ECB announcement last week has reduced the pressure on Spanish government
bonds, allowing the government to borrow at more affordable costs as it attempts to fix
its finances. But the markets may turn sour in the wake of Mr Rajoy's comments, as
traders had been expecting Madrid, which has already had to go cap in hand to its
European partners for money to prop up its ailing banks, to apply for the ECB's help.
The Rajoy government has already raised income tax and value-added tax and pushed
through billions of euros of cuts to public services including education and health.
However, the PM said that pensions would not be cut in the 2013 budget.
Speaking ahead of a government review of Spanish lenders, Mr Rajoy also questioned
whether or not the country's banking industry actually needed the bailout of up to 100bn
(80bn) agreed last year as it tried to cope with massive debt write-offs following a
property market collapse.
Despite his words, market watchers still expect Spain to seek the help of its European
partners. "The stricter the conditions, the more unwilling will Spain be to request support.
Still, we see it as almost inevitable that Spain will eventually have to relent and request
aid," Merrill Lynch analyst Bill O'Neill said.
As for when the dam may break, Mr O'Neill reckons that will come in mid-October, when
the Spanish government has a "demanding market funding schedule".
Signs of Spanish resistance could, however, trigger a reversal in the market rally caused
by the ECB announcement. "The market has been overbought in the short term after the
ECB announcement," said Henrik Henriksen, the chief investment strategist at PFA Pension
A/S in Copenhagen, where he helps to oversee $55bn in investor cash.
Mr Rajoy's comments come as investors nervously look forward to another crucial week in
Europe, with the German constitutional court in Karlsruhe to decide today whether to stop
Germany's participation in the 500bn European Stability Mechanism bailout fund. A ruling
against participation could threaten the future of the euro.
Meanwhile, the Greek tragedy continued to unfold yesterday, with the Greek Prime
Minister, Antonis Samaras, flying over to Frankfurt to explain to the ECB President, Mario
Draghi, why he had failed to secure agreement from his coalition partners on further
spending cuts.
Beyond Europe, debt woes continued to haunt the United States, which was threatened
with another ratings cut this time by the Moody's ratings agency, which said it could
lower its AAA rating for the country, probably by one notch, if federal budget talks break
down.
Mr Rajoy's comments come as investors nervously await another crucial week in Europe
Euro crisis: Where the states stand
Germany
All eyes will be on the German constitutional court today as it rules on whether the
eurozone's most powerful member can take part in the European Stability Mechanism, the
currency bloc's permanent bailout facility, which is meant to replace the European
Financial Stability Facility. A nein from the court will probably send markets into a tailspin
as it will cast serious doubt on the zone's ability to shore up weaker members and the
single currency. However, a nod from the court's red-robed judges which is what most
analysts expect will be far from the end of German opposition to funding bailouts, with
legal challenges now being lodged against the ECB's bond-buying scheme.
Greece
If Spain is in the eurozone emergency ward, then Greece could be about to enter the
morgue. The government of Antonis Samaras has failed to agree a further 11.5bn (9bn)
of cuts that the Prime Minister has said is key to securing the future of the country's
bailout funding. The leaders of the three parties in the coalition government will meet
today to try again to thrash out an agreement, but their main hope seems to rest on
getting the EU to agree to a softening of its austerity requirements, with Mr Samaras
meeting Mario Draghi, the European Central Bank chief, yesterday to plead his country's
case ahead of a summit of eurozone finance ministers on Friday.
Italy
Like his Spanish counterpart, the Italian Prime Minister, Mario Monti, is believed to oppose
extra conditions being imposed on his country before it can benefit from the ECB's new
bond-buying scheme. Yesterday, he admitted to journalists that his government had
"aggravated" the recession with its austerity measures but said it would invest 50bn in
infrastructure in the coming months. His comments came as it emerged that the second
quarter for the Italian economy was worse than originally forecast, with a contraction of
by 0.8 per cent between April and June, instead of the original figure of 0.7 per cent.
France
One of Continent's strongest advocates for pro-growth policies, President Franois
Hollande is himself set to unveil a dose of George Osborne-style belt-tightening to keep
French finances in check. Up to 30bn of tax rises and spending cuts are expected to be
the key feature of France's upcoming budget. The Socialist leader also pledged to reform
the labour market, in the face of union opposition, as he aims to return the economy to
growth by 2014 while narrowing the fiscal deficit to around 3 per cent of economic output
by next year.
Portugal
Recession-hit Portugal enjoyed some rare good news yesterday with the EU and IMF
agreeing to loosen budget controls imposed as part of the country's 78bn bailout. This
means the government will be able to run a slightly bigger deficit than originally planned
without endangering the next tranche of cash from the EU and IMF. The reprieve follows
the deterioration of the country's finances following worse than expected tax revenues as
the economy bumps along in its worst recession since the 1970s. Nevertheless, the
government of Pedro Passos Coelho has been praised by the Troika for "staying the
course" over austerity, even recently raising workers' social security contribution rates.