Spanish Prime Minister Mariano Rajoy has battled for months to avoid the indignity of applying for a formal bailout from his European partners.
With Spain much closer to the single currency’s heart — both geographically and politically — than laggardly Greece, Rajoy has received plenty of support, including the promise of a 100 billion euro (US$128.98 billion) injection of funds directly into the bombed-out banking sector. After Friday’s announcement of the results of an audit of the bombed-out banking sector revealed a 60 billion euro black hole, those funds will be essential.
However, with borrowing costs for Spain climbing close to the 6 percent level that has repeatedly signaled danger throughout the crisis, most euro-watchers expect Rajoy to be forced to accept a package of aid, along with the strict list of terms and conditions that would imply.
Meanwhile, Moody’s is expected to deliver its verdict on Spain’s sovereign debt rating in the coming days, and a downgrade could just be the catalyst the markets need to drive up Madrid’s borrowing costs to dangerous levels.
Last week’s Spanish budget, which contained numerous new spending cuts and reform measures and won the approval of the European Commission, was widely seen as a bid to pre-empt any extra austerity measures that Spain’s creditors might be likely to impose.
A bailout would allow European Central Bank (ECB) President Mario Draghi to deploy his “outright monetary transactions” and make unlimited purchases of Spain’s bonds. However, going cap-in-hand to the troika — the ECB, European commission and IMF — would still be a deep political humiliation for Rajoy, at a time when Spain’s regional leaders are jockeying for independence and sky-high unemployment of more than 25 percent is imposing an excruciating cost on the population.
Even if Rajoy can drive through the measures needed to secure a bailout in the face of mass public opposition, hold the Spanish state together despite growing separatist sentiment and rebuild the country’s battered banks, the road back to prosperity looks like a long, hard one — and that is already a lot of ifs.
One of the things that most alarmed Europe’s financial markets last week was the outcome of an obscure meeting in Helsinki that suggested the single currency’s paymasters have decided to play hardball.
Finance ministers from the Netherlands, Germany and Finland — the eurozone’s paymasters, and also its most hardline members — gathered for talks in the Finnish capital and issued a statement clarifying the eurozone rescue deal that was reached after make-or-break talks in June.
At the time, the agreement appeared to mark a positive departure in the crisis, helping to sever the connection between the balance sheets of sickly banks and the finances of states. It was agreed — or so it appeared — that the eurozone bailout fund, the European Stability Mechanism (ESM), would be allowed to inject money directly into ailing banks in eurozone countries.
That would prevent their governments from having to apply for a full-blown bailout, with all the attendant misery of troika inspections, and halt the vicious circle in which bank bailouts shift losses onto the public finances and weaken public finances by depressing the value of the government bonds that are the banks’ main source of capital.