The Spanish Crisis Deepens

Has a Spanish bailout become inevitable? Yields on the country’s 10-year bonds spiked above 6 percent on Sept. 26, after Madrid was convulsed by anti-austerity demonstrations and the head of its largest region, Catalonia, called for “self-determination” elections. Adding to the pressure, newly released data showed the economy contracting and budget deficits rising, while the finance ministers of Germany and other “donor” countries suggested Spain might need to pump more money into its troubled banks before getting help from the European bailout fund.

Prime Minister Mariano Rajoy until now has played coy about the question of a sovereign rescue, since in return for a rescue the Spanish would have to accept even harsher austerity measures than they already have. But Rajoy’s office, confirming remarks made in a Wall Street Journal interview, said Rajoy was “100 percent” ready to ask for a bailout if the country’s borrowing costs remained “too high for too long.” Those comments were “like a red rag to a bull in terms of the market needing to strong-arm Spain into accepting aid,” Richard McGuire, a fixed-income strategist at Rabobank International in London, told Bloomberg News.