Rajoy Plays Chicken with EU and ECB: A Slight Reprise

Rajoy vows no bailout without lower yields – FT.com.

Despite German posturing, Europe needs Spain to request a bailout because if Spain runs off the rails it will take the eurozone with it.

The Spanish Finance Ministry began issuing suspicious numbers in July to allow the Prime Minister to hold out in requesting this bailout as long as possible. Make no mistake about it; the best thing one can say about Spain is that it is not as bad off as Greece.

The country is in the midst of a depression with its economy predicted to shrink by 1.5% this year and next according to the IMF and a consensus among economists. Of course, Spain is predicting a smaller decrease next year with a return to growth in 2014.

It is also lying about its financing needs for 2012. Amidst its depression and decreasing tax revenues, Spain will require an extra €52bn in financing. Admitting this fact will require it to accept a bailout without extracting conditions from the ECB and EU, so Spain will continue to sell bonds after it meets it “target” for 2012 and claim that it has begun fulfilling financing needs for 2013.

As long as it can maintain the narrative of improving bond market sentiment, it will so that Rajoy can hold out for better bailout terms.

If you read in between the lines of his comments in this article, Rajoy is seeking an ECB guarantee to maintain a 200 basis point spread between Spanish bonds and German bunds. He also wants the bailout to include no new conditions beyond those that Spain has already passed.

The ECB has stated that it will not target a particular yield level, and the German-led EU is on record as demanding bailout conditions monitored by an outside group, possible the IMF.

Neither side is willing to budge at this point, which leads to this dangerous game of chicken. Market sentiment can change in an instant, and by then it may be too late to help Spain and hold the eurozone together.



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