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

MADRID — 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.

(PIERRE-PHILIPPE MARCOU/AFP/GETTY IMAGES) - 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.

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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.

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.