Rajoy Plays Chicken with EU and ECB

Spain wants risk premium guarantee before asking for bailout | In English | EL PAÍS.

The reason that Rajoy is holding off on the bailout is because he can. As I wrote just a few days ago, Spain will run out of money sometime before the end of the year. It simply has to sell too much debt:


By my calculations, the Finance Ministry has to place €66bn to finance itself before December. Spain does not have real access to bond markets. Its insolvent banks have been virtually the only customer for its debt for the past few months.

Even though Spain’s finances are in a parlous state, the rest of Europe needs Spain to request a bailout just as much as it needs the money. If Spain fails to sell the required debt, it will default, and the thinking goes that contagion will spread.

Rajoy wishes to avoid the humiliating conditions of a bailout while ensuring that the ECB will do enough to keep Spain’s bond prices within 200 basis points of bunds.

The Spanish finance ministry claims that a 200 basis point spread is reasonable. When it gets serious, you have to lie. Spain has quadruple the unemployment rate and budget deficit of Germany with a shrinking economy. It’s credit rating is one step above junk. At the proposed price, these bonds would be cheaper than those of Italy’s, which is in much better economic shape.

We cannot blame Spain for trying. These are the requirements for activating the OMT:

  1. Spain must request a bailout.
  2. Its conditions must be accepted.
  3. Goals must be set.
  4. EU members must approve it.

Note that 2 & 3 are written in the passive voice. Who is setting the goals and conditions? Is it the EU, the ECB, Spain or Germany?

If I were Rajoy, I would wish to limit the EU’s room to maneuver. Currently, across the Mediterranean in Greece, the troika sees fit to make Greece stick to conditions made impossible by the very austerity being implemented. This allows the northern tier troika to withhold money from Greece to score political points with their bailout-weary electorate.

Rajoy should dig in and obtain the necessary guarantees so that the Greek cycle does not repeat itself in Spain.


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