Rajoy Says Spain Must Know Rescue Would Bring Down Yields

Prime Minister Mariano Rajoy said Spain needs to know how much its borrowing costs would fall if it sought a European bailout, as he continues to push the European Central Bank to improve its bond-buying offer.

“The issue is not only conditions, but how much the spread will narrow, because if it means the risk premium stays around 400 basis points and doesn’t fall to 200, well, obviously that’s not the same thing,” Rajoy told Cope radio today in Madrid. The premium is now 424 basis points.

Rajoy said last week that sometimes the “hardest decision is not to take any decision. He has been considering an aid request for three months. Spain, which has yet to receive any of the 100 billion-euro ($128 billion) June bank bailout, wants to avoid having any sovereign rescue bid stymied by the ECB or European government.

‘‘We have to guarantee the support of all the countries of the European Union,’’ he said. The government hasn’t made any decision and the ‘‘possibility is there’’ to make a request.

Spain’s 10-year bond yields fell to 5.70 percent at 11:20 a.m. today in Madrid from 5.75 percent yesterday. That’s down from 7.2 percent on Aug. 2, when the ECB first offered to intervene in the bond markets of nations that agree to the conditions of the loan programs led by euro-region governments.

‘Already Good’

The bank hasn’t set thresholds or targets for bond buying. It has reserved the right to stop propping up the market if governments fail to stick to their side of the bargain. Asking for a rescue doesn’t automatically trigger bond-buying as the Frankfurt-based bank has said it will consider so-called Outright Monetary Transactions ‘‘to the extent that they are warranted from a monetary policy perspective” and stop them “once their objectives are achieved.”

“Any formalization of a spread target is very unlikely for the ECB, and the OMT is more geared towards avoiding abrupt spike in yields if tensions arise rather than keeping them anchored to a specific target,” said Silvio Peruzzo, an economist at Nomura International Plc in London.

Rajoy said the ECB’s offer is “already good,” pointing to the decline in borrowing costs. It would “make little sense” to request a bailout if it didn’t bring them down further, he said.

While the Treasury has covered nearly all its issuance needs for this year, “very high” financing costs “for a long time” would prompt a bailout request, he said. The government is committed to cutting the budget deficit, even as he said he hopes to avoid further tax increases and to be able to reduce levies in 2014, in line with a pledge last year that tax hikes would only last two years.

Deficit Doubts

BBVA Research, the analysis arm of Spain’s second-biggest bank, questioned Rajoy’s deficit forecasts, and said more measures may be needed to offset slippage amid a shrinking economy. A “particularly negative aspect” of some of the government’s cuts is their temporary nature, BBVA said.

BBVA forecasts the economy will shrink 1.4 percent this year and the same in 2013. That compares with the government’s 1.5 percent estimate for this year and 0.5 percent contraction in 2013, when it aims to cut the deficit to 4.5 percent. BBVA says the deficit target will be missed in both years.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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