Spain’s prime minister takes a gamble in not seeking bailout

October 7, 2012

Spain’s conservative prime minister, Mariano Rajoy, is not known as a gambling man. But as Europe’s debt crisis stretches on, he is playing a tense game of chicken with the financial markets, betting that Spain can balance its books with homegrown austerity while putting off — maybe forever — a humiliating bailout from the European Union.

The stakes are high, for Spain and beyond. After Greece, which is undergoing the financial equivalent of open-heart surgery, Spain has become the focus of doubts about the health of over-indebted European economies. Despite repeated rounds of politically difficult budget cutbacks and tax increases, it is struggling to reduce a deficit that stood at 8.9 percent of gross domestic product for 2011 and to finance at bearable interest rates a debt estimated at $900 billion, 70 percent of its GDP.

Should it follow Greece into bankruptcy, Spain, with a $1.3 trillion economy that is the fourth largest in the European Union, would generate distinctly greater shock waves than the failure in Athens, according to European economists. A collapse here, they say, would shake the foundations of the euro, the E.U. currency adopted by 17 of the union’s 27 members, sending ripples across the Atlantic and undercutting economic recovery in the United States.

Against that background, the volume is rising uncomfortably on appeals to Rajoy to turn swiftly to the E.U. for a rescue package to reassure skeptical markets and prevent a flare-up of interest rates for Spain’s repeated trips to the bank. The Spanish leader could face pressure to make up his mind at a meeting Monday of E.U. finance ministers to inaugurate the European Stability Mechanism.

The mechanism, a mutual backstopping fund potentially reaching $650 billion, was conceived precisely for cases like Spain’s. The country’s situation is likely to be discussed by the finance ministers, but Rajoy has gone to great pains to discourage speculation that he might ask for help.


Spanish Prime Minister Mariano Rajoy gestures during a press conference in Madrid on October 2, 2012, after the fifth Regional Presidents Conference. Spain is not planning to make an imminent demand for a sovereign bailout from the eurozone to end its financial crisis, Mariano Rajoy said Sunday, October 7, 2012. (PIERRE-PHILIPPE MARCOU/AFP/GETTY IMAGES)

Christine Lagarde, head of the International Monetary Fund, made a suggestion last week that it was time to move. Joaquin Almunia, a European Commission vice president, said that Rajoy’s indecision was bad for Europe. Mario Draghi, chief of the European Central Bank, which would play a key role in any bailout, said pointedly that the choice was up to Rajoy, a remark seen here as a nudge for him to take the plunge.

Closer to home, the president of the Catalonia regional government, Artur Mas, said outright that the time had come and Rajoy should stop hesitating. Similar advice came from Jose Manuel Gonzalez-Paramo, who worked with Draghi at the ECB until May and who suggested that Spain needs to swallow its pride in favor of the guarantees a rescue package can offer.

“We need the umbrella that the ECB mechanism can provide,” he said in a Q&A with La Vanguardia newspaper. “If you prefer, don’t call it a bailout. Call it financing.”

Despite the appeals, Rajoy is still holding off, seeming to enjoy the suspense. Usually mirthless, he cheerfully teased reporters last week by denying reports that a request for a bailout was imminent but adding that they might at some point turn out to be true. His economy minister, Luis de Guindos, was more serious but hardly more forthcoming in testimony the same day before a parliamentary committee.

“The Spanish government has the responsibility to analyze all the consequences [of a bailout], as much in one direction as in the other, and taking into account all the implications they have, for us and for all the European Union,” he said when asked what Rajoy intends to do.

Draghi bought Spain some time by announcing last month that the ECB would step in and buy government debt on the secondary market. In effect backstopping financial institutions that buy government bonds, the prospect of ECB intervention immediately lowered interest rates. But the ECB has not actually done any buying; Draghi specified that the bank would step in only after Spain formally requested help from the Stability Mechanism, which replaces a similar financing pool called the European Financial Stability Fund.

The difficulty is that any help from the stabilization mechanism would be accompanied by more austerity requirements and Greece-style E.U. supervision to make sure they are carried out. Germany, among others, has made clear it would settle for no less.

For the proud people of Spain, who already have been shocked by three years of penny-pinching, this would be a blow that Rajoy’s conservative Popular Party would have a hard time overcoming.

National pride was already piqued here by last week’s debating point from Republican presidential candidate Mitt Romney, who said Spain was an example of what the United States should not do. A fellow conservative, Foreign Minister Jose Manuel Garcia-
Margallo, immediately responded that Romney’s view was out of touch with Spanish reality.

‘Enormous efforts’

Most economists in Spain’s financial industry and academia are convinced that a bailout will be necessary sooner or later, according to Rafael Pampillon Olmedo, director of economic analysis at the IE Business School in Madrid. In fact, he said, the government consulted carefully with European officials in deciding on its recent budget, tailoring cutbacks and taxes in advance for what all expect will be the inevitable rescue package.

But Rajoy’s problem in holding off was underlined Friday by Luis Maria Linde, governor of the Bank of Spain, who warned a congressional committee that the government will have trouble meeting its often promised goal of limiting the 2012 budget deficit to 6.3 percent of GDP.

A large deviation from the goal could swiftly translate into higher interest rates, dissipating the benefits of Draghi’s promise and making Rajoy’s bet look even more like a long shot. The face-off with bond traders, economists suggested, is likely to be settled by how these numbers play out in the final months of the year.

As for next year, despite signing a fiscal discipline treaty obliging Spain to keep its deficit down to 3 percent, Rajoy has negotiated a timeout with E.U. authorities and set the goal at 4.5 percent — which at this point also looks hard to reach.

In the meantime, Pampillon noted, Rajoy’s party faces difficult regional elections Oct. 21 in the Basque Country and Galicia, his home district, and thus is unlikely to make a decision before then on a bailout. But Jose Ramon Garcia Hernandez, who runs foreign relations for Rajoy’s Popular Party, said the key to a decision is not politics, but implementation of a previous $130 billion deal with the E.U. to bail out overdrawn Spanish banks.

“We have made enormous efforts,” Garcia added, “and now it’s up to the E.U. to carry out its promises.”

The banking funds are on the agenda for the meeting Monday of the E.U. finance ministers and are expected to land in the coffers of Spanish banks next month.

‘Things are really tough’

Whatever Rajoy’s schedule, resort to a cutback would carry a heavy political price. Coming down hard from a boom of loose money and real estate speculation, Spanish people seem shocked by a slowdown that has produced a 1.8 percent shrinkage of the economy, 25 percent unemployment and a drop in most families’ standard of living.

“We spent all our money, and now we have to pay up,” lamented Jorge Barra, 36, who has found part-time work putting up outdoor advertising.

The fear of still more cutbacks has been intensified by news from Athens, where E.U., IMF and other bureaucrats are busy telling Greek officials how much they can spend while outraged protesters clash repeatedly with police. Many Spanish people reject the prospect of an E.U. rescue package because they think austerity has gone far enough and they do not want others telling them what to do.

“We could get the money, but then we’d have to pay,” said a security guard at an office building who wanted to be identified only as Javier. “And we’ve already paid. Things are really tough here.”

With that in mind, said Juan Moscoso del Prado Hernandez of the opposition Socialist Party, Rajoy is squirming as long as he can “to avoid the photo” of going to Brussels to ask for help.

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