Spain Prepares for Bailout as Monti Primes the Printing Press
Following last Thursday's press conference and interest rate decision, Spain may need to submit to a full sovereign bailout to receive any further European support for its finances. The news follows weeks of discussion over the mechanics of a banking sector bailout for Spain, which would add approximately $123 billion of additional debt to Spain's finances.
Last week, European Central Bank President Mario Monti said that the Bank stands ready to purchase bonds on the secondary market should nations submit to European programs. By programs, he meant a full sovereign bailout and effectively the giving up of fiscal sovereignty for nations such as Spain and Italy. The two would follow the likes of Greece, Ireland and Portugal into the grips of staunch budget cuts, tax hikes and privatization of state-sponsored companies.
The burden now falls on Spain's Prime Minister Mariano Rajoy and Finance Minister Luis de Guindos Jurado. Late last week, Rajoy stated that he would like to know what sorts of stability would be offered before submitting his country to a bailout. He must now wait for Draghi to convince other ECB Governors to get on board with the plan. Investors have speculated that Draghi was unable to launch a new bond buying program because conservative members opposed such a plan and he could not create a plan with enough concessions to conservatives to launch bond purchases.
One large opponent has been the President of the Bundesbank, Jens Weidmann. The former economic advisor to German Chancellor Angela Merkel has been one of the largest opponents to ECB action fixing what has largely been a fiscal crisis. The ECB cannot fund fiscal deficits as per its charter and Weidmann feels as though bond purchases would do just that. Therefore, any bailout may end up coming from the joint bailout funds, first the temporary European Financial Stability Facility (EFSF) and then the permanent European Stabilty Mechanism (ESM).
At the most recent European summit, leaders agreed to allow the EFSF to purchase bonds on the primary market (at auction). Reservations over placing the burden of bond stability on the rescue fund arose last week due to the fact that the EFSF only has about $308 billion of remaining capital to invest. However, these fears seem to have been quelled over the weekend following reports of the EFSF searching for banks to give it credit lines, increasing its capital six-fold to nearly $1.85 trillion. This amount of capital is significant and could be enough to stabilize Spain and give some assistance to Italy.
The seeds for a plan to save the euro seem to have been laid, but the rate of further progress may be determined by the political will of European leaders to move forward. The burden falls on Rajoy and de Guindos to act decisively and quickly. Sill, many consider submitting for a bailout to be political suicide for the two. For a bailout, Rajoy would most likely have to agree to a series of politically unpopular budget cuts and tax hikes, which could further hurt the economy in the short-term, though conceivably providing long-term benefits. By inflicting further economic pain on Spain, Rajoy could potentially lose his job, begging the question: is a lifelong politician ready to go the way of politicians from Greece, Ireland, and Portugal to save his country?
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