Spanish Prime Minister Mariano Rajoy said euro-zone countries must urgently implement decisions including government bond purchases agreed to in June as the country can’t finance its deficit under current conditions.
The premier said he will announce additional measures this month to control the country’s budget shortfall. Spanish regional leaders must cut more spending as tax revenue slumps amid the country’s second recession since 2009, he said today in a speech in Navacerrada near Madrid.
“It’s time to go from words to deeds,” Rajoy said. “Europe must comply as quickly as possible with the agreements its leaders reached in Brussels. The European project is at stake.”
Rajoy is facing renewed pressure from bond investors after the European Central Bank took no action to lower yields at its July 5 meeting. Bond yields tumbled on July 2 after European leaders agreed to allow euro-area bailout funds to buy the debt of governments such as Spain and Italy.
The additional yield investors demand to hold Spanish 10-year bonds rather than benchmark German bunds rose to 563 basis points yesterday from 486 basis points on July 2.
Spain’s 10-year yield rose 62 basis points in the week that ended yesterday, July 6, the most since the five days through June 15, to 6.95 percent. It reached 7.04 percent yesterday, the highest since June 20.
Euro-region finance ministers will aim to enact the June 29 agreement at a meeting on July 9, European Union President Herman Van Rompuy said last week.
The ECB lowered its benchmark rate to a record low 0.75 percent on July 5, disappointing investors who had predicted it might restart its government-bond buying program to ease stress on Spain and Italy. The central bank will only buy government debt if it considers it necessary to keep inflation on track, Benoit Coeure, an executive board member, said yesterday.
“If the governments decide to do it they should go ahead,” Coeure told a meeting of the Circle of Economists. “That doesn’t mean the ECB can’t buy Italian and Spanish debt on the market, but they’ll do it if it needs to for reasons of monetary policy and not otherwise.”
At last month’s summit, euro-area leaders agreed to use rescue funds “in a flexible and efficient manner in order to stabilize markets for member states” that respect rules including budget-deficit limits.
The EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting the ability to lower the nations’ borrowing costs.
The rescue mechanisms, the European Financial Stability Facility and the yet-to-start European Stability Mechanism, may have 500 billion euros available for purchases. Italy and Spain have about 2.4 trillion euros combined of outstanding bonds, bills and loans, according to data compiled by Bloomberg.
Rajoy said Spain needs to deliver on its own budget-deficit target in order to maintain its influence on European decision-making. He will publish a plan to eliminate duplication in local government in Spain, which has national, regional and town hall administrations. The government is also devising a program to improve Spain’s public education system that is due to be released after the summer break, he said.
“We need to control the budget deficit,” he said. “It’s essential to eliminate it because we can’t finance it at the moment. Anyone can understand that.”