Germany Approves Bailout for Spain

No further austerity for Spain, says Rehn – FT.com.

Rehn stating that Spain will not have to make more budget cuts means that either the ECB will keep Spain afloat by purchasing its debt or  Spain will request an official bailout.

Spain has a target budget deficit of 6.3%, but many analysts are forecasting a 8% deficit. Since everyone has been behind the curve from the beginnings of the eurocrisis, it is safe to assume that the true deficit will be close to 10% when the number is quietly released next year.

A larger deficit leads to greater financing needs, which must be met by larger bond issuance. Spain has been lying about its financing needs for quite some time now, but eventually investors will catch on and begin demanding higher premiums. It will not be able to sell all the bonds it needs to without help from the ECB.

Rehn has just paved the way for this help by stating that Spain will not have to meet new austerity targets. Rajoy may still be holding out for a yield cap, but this may be the best deal he can get.

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