Rajoy Won’t Resign

Spanish 2yr Yields

Chart courtesy of ZeroHedge

Spain’s opposition Socialists tell Rajoy to resign | Reuters.

The Socialists’ demand for PM Rajoy to resign will not amount to much. The Spanish Socialists were thrown out of office in 2011 for implementing austerity measures. Rajoy promised an end to austerity, won the election and promptly continued the austerity program.

This is the sad state of Spanish politics. Whichever of these large parties holds power, the result will be the same because the FANG countries are calling the shots in Europe.

Since the majority finds itself embroiled in a scandal, it is standard operating procedure for the minority to make a lot of noise and demand a resignation. Rajoy will not resign.

The situation has changed since I wrote this post, https://dareconomics.wordpress.com/2013/01/31/spanish-pm-embroiled-in-corruption-scandal/

On Thursday, the PP was claiming that the ledger at the center of the scandal was not valid. Today, the PP has subtly altered its argument claiming that the books in question have been doctored. At this point, everyone knows that Rajoy was accepting illegal cash payments, but this is a difficult case to prove.

As long as no one steps forward to testify that the books are real or that they witnessed Rajoy accepting the payments, he should be safe from prosecution. A large majority in Spain’s parliament ensures that he will not have to resign.

If bond yields were reflecting this information, I should think that they will settle down once speculators realize that Rajoy isn’t going anywhere. However, I do not believe that political instability is the cause of the rise in bond yields. Rather, it seems that Spanish banks have repaid their LTRO loans. With less money to invest, they are holder fewer bonds.

A similar dynamic could be occurring in Italy causing bond yields to rise. It does not matter who rules either of these countries as along as German money and the promise of more German money is keeping them afloat.

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