Spanish Prime Minister Mariano Rajoy may be delaying a bailout request on a bet that renewed market tension will also force Italy to seek aid, strengthening his bargaining power and giving political cover.
Spain will have more leverage if it can fend off a rescue until Italy joins it in needing European Central Bank help to bring down the cost of servicing its debt, said Raphael Gallardo, head of macroeconomics at Rothschild Asset Management in Paris. The gap between Italian and Spanish yields widened to 68 basis points at 9:30 a.m. in Madrid from 65 points yesterday.
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Spain “would be in better company and would suffer less stigma if it was to ask for a rescue at the same time as Italy,” said Gallardo, who helps manage 20 billion euros ($26 billion) of investments. “Italy needs further austerity efforts so those are probably more reachable with the support of the European Union and the ECB.”
To pull that off, Rajoy needs to tighten the gap between Spanish and Italian borrowing costs, reversing the trend that has pushed Spain’s yields above Italy’s since March. Investors have increasingly seen Rajoy as the next candidate for a bailout since he came to power in December, after a series of policy reversals and communication gaffes.
On Dec. 30, the day Rajoy announced his first package of measures, Italian 10-year yields were 202 basis points higher than Spain’s. Spain has paid more than Italy since March and the measure peaked in July with Spanish yields 116 basis points above Italy’s. It has narrowed 22 basis points since ECB President Mario Draghi offered to buy the debt of nations that agree to a bailout from the euro region’s rescue fund.
The spread may narrow further because of the volume of debt Italy still needs to sell this year, Peter Schaffrik, head of European rates strategy at RBC Capital Markets LLC in New York, said in a client note yesterday. The Italian treasury plans to sell another 16 billion euros of debt this week after yesterday auctioning 5.4 billion euros of zero-coupon and inflation-linked bonds. Spain has already sold 83 percent of the bonds it plans to issue this year.
While the Spanish premier is resisting pressure from investors and prodding from France to trigger the aid before the rally prompted by Draghi’s pledge fizzles, Italian Prime Minister Mario Monti may be positioning himself to benefit from a Spanish bailout without having to submit to conditions in exchange.
“Application of this new facility by Spain would sort of show to markets that the European Union now has the instruments to deal with this systemic problem regarding the transmission of monetary policy that could have a beneficiary effect on all the structural market interest rates,” Fabrizio Saccomanni, the Bank of Italy’s director general, said in a Sept. 24 interview.
A spokeswoman for Rajoy, who asked not to be named in line with government policy, pointed to the premier’s Sept. 12 statement to Parliament when asked for comment. Rajoy said then he can’t decide on a bailout request until he knows the conditions and it may not be necessary to ask for aid.
Monti and Rajoy face contrasting challenges. While Italy’s deficit was 3.9 percent of gross domestic product last year and the nation has a surplus before the cost of interest payments, its 1.9 trillion-euro debt amounts to 120 percent of GDP, the highest burden in the euro region after Greece. Spain is struggling to rein in a deficit that reached 9 percent of GDP last year, even as its 735 billion euros of debt, or 69 percent of GDP, is the lowest of the four biggest euro members.
Italy’s economy contracted 0.8 percent in the second quarter, twice the pace of Spain’s, even as Italy’s jobless rate is less than half the 25 percent suffered by Spaniards.
Rajoy’s stalling is prompting mixed signals from Germany, where Parliament would have to approve any rescue. Finance Minister Wolfgang Schaeuble said Spain would be “daft” to ask for aid, while a senior lawmaker criticized Rajoy’s approach.
“He must spell out what the situation is,” Michael Meister, finance spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said in an interview in Berlin on Sept. 24. The fact he’s not doing so shows “Rajoy evidently has a communications problem. If he needs help he must say so.”
The conditions attached to a possible bailout also remain a sticking point for Rajoy. The Spanish premier said this month he won’t allow European officials to dictate specific policies in exchange for aid while his Finnish counterpart Jyrki Katainen said budget deficit pledges won’t be enough to trigger ECB bond buying.
Deputy Prime Minister Soraya Saenz de Santamaria, who last week started setting out arguments in favor of a bailout, said yesterday Spain must know the conditions it would be subjected to before signing up, and wants to know how much the ECB intends to spend supporting the Spanish market.
“To take decisions you need to have all the elements on the table,” she said in an interview with Cadena Ser radio station. “There are many fronts we have to tackle.”
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