Thursday

23rd Nov 2017

Analysis

Spain's bailout dilemma: not if, but when and how

  • Madrid's bailout request is a matter of time (Photo: Toni Verdú Carbó)

Markets went briefly euphoric on Tuesday (16 October) when two German lawmakers suggested Berlin is warming to the idea of a Spanish bailout. But the wait-and-see game in Madrid is likely to take a few weeks longer.

Bloomberg quoted two Christian Democrats in Berlin - Michael Meister and Norbert Barthle - suggesting a "precautionary loan" or a "full bailout" for Spain are possible, but only with "conditions."

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Back in June, Spanish officials spoke about the European Central Bank's need to intervene on the bond markets in order to lower the country's crippling borrowing costs, which did not go down despite an announced €100 billion bailout for the country's troubled banks.

The ECB moved quickly by its standards. In August its chief Mario Draghi hinted at an intervention which would be "enough" to calm markets - the so-called Outright Monetary Transactions (OMT) which were detailed the following month.

In order to keep Germany happy, the unlimited bond purchases would take place only with strings attached. Madrid would have to sign up to certain reform promises, much like any other bailed-out country.

As the ECB announcement had a soothing effect, with bond costs going back to sustainable levels, Madrid has so far hesitated to ask for the new scheme.

With upcoming elections in the northern Spanish regions of Galicia, the Basque Country and Catalonia, where calls for independence are getting louder, it is difficult for Prime Minister Mariano Rajoy to break the news of full bailout.

For now, Rajoy is able to blame the stalemate on the divergence of opinions within the eurozone itself. Spanish officials on Monday briefed foreign journalists in Madrid on the imminence of the request, but only once Rajoy is convinced he has the backing of all other euro-countries.

This is code for Germany and Finland. The Finnish government has, according to sources, asked its Spanish counterpart to delay the request until local elections take place on 28 October.

Germany would also like to see the Spanish bailout request in November at the earliest, so it can be tabled to the reluctant Bundestag as one "package" with the likely Slovenian bailout and a possible two-year extension for Greece's repayments.

But last week Standard&Poor's ratings agency put Spain just one notch above 'junk' where the risk of default is too high for safe investors, such as pension funds.

And on Monday, the same agency put 11 Spanish banks, including giants Santander and BBVA, on the same BBB- level as the government rating, meaning banks will have to pay more to get loans from the ECB and their bonds will be worth less when they buy up government debt.

Rumours of a similar downgrade by Moody's - another big ratings agency - are adding to the pressure on Rajoy to move on the bailout request.

However, views differ as to whether markets will immediately move on to the next country - Italy - or if they will continue to test Spain, as the ECB has made it clear that it would stop buying its bonds if Madrid does not deliver on reform promises. As anti-austerity movements are on the rise again, this will be a tricky task for Rajoy to master.

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