Italian Prime Minister Mario Monti said the European Central Bank’s bond-buying plan reduced the stigma of asking for aid, as he followed Spanish counterpart Mariano Rajoy in resisting tapping the bailout program.
“The drama in the word ‘help’ has been reduced,” Monti said at a press conference yesterday in Rome. “Now, there are ways in the European Union, which must be used under careful conditionality and in the interest of all, to confront” unreasonable increases in borrowing costs, he said.
Monti said he was trying to avoid seeking aid, and echoed Rajoy in saying it was premature to comment on the details of the plan. Rajoy said in Madrid he needed time to study the proposal, resisting pressure to say whether he would seek a rescue more than a month after saying he may consider it.
ECB President Mario Draghi handed the initiative back to governments as he said the central bank would only buy debt from nations that seek aid tied to strict conditions from Europe’s government-led rescue facilities. Rajoy, who faces a regional election next month amid a slide in popular support, may be playing for time as he tries to soften the austerity demands tied to such support.
Spanish bonds rose today, pushing the benchmark 10-year yield below 6 percent for the first time since May 25. It hit a euro-era record of 7.75 percent on July 25. The yield on Italian debt of a similar maturity fell as low as 5.03 percent at 9:36 a.m. in Rome.
“What Rajoy is doing is to continue trying to limit conditionality as much as he can,” Antonio Barroso, a political scientist at Eurasia Group in London and a former Spanish government pollster, said in a telephone interview. “Judging by what he’s done in the last six months, he’s never been very proactive and there’s no reason for him to change today.”
Rajoy, who denied Spain would need a bailout for its banks less than two weeks before seeking one, said after meeting Chancellor Angela Merkel yesterday that he hadn’t made any new commitments to his German counterpart. Merkel said they “didn’t talk at all about conditions” for a possible Spanish bailout. The government, which has kept an election pledge to shield pensions from cuts even as it ditched other promises, has no plans to reduce retirement benefits, Rajoy said.
“When I have anything new to tell you, I will say so,” Rajoy told reporters. “For the moment I haven’t even had the time to read about Mr. Draghi’s intervention.”
ECB policy makers agreed on an unlimited bond-purchase program aimed at regaining control of interest rates and fighting speculation of a breakup of the currency. The program, targeting government debt with maturities of one to three years on the secondary market, will be activated if a country has asked Europe’s bailout fund to buy its debt on the primary market. The International Monetary Fund will be asked to help design and monitor country-specific plans.
“It is obvious the government needs financial aid but it also has a reputation to take care of,” said Alfredo Arahuetes Garcia, head of the economy department at Pontificia Comillas University in Madrid. “The government doesn’t want to look desperate, it wants to look like it’s negotiating on an equal basis, not being thrown the lifebuoy as its about to drown.”
ECB policy maker Luc Coene underscored the conditions in comments to reporters late yesterday. Aid “will depend on all the other instances that have to approve these things and then we will intervene,” said Coene, who heads the Belgian central bank.
Galicia, Basque Votes
Rajoy faces regional votes in his home region of Galicia, where his People’s Party governs, and in the Basque Country, on Oct. 21. His government postponed the 2012 budget until after elections in Andalusia in March, undermining confidence in the new government.
“With the local elections in Galicia around the corner, Rajoy himself probably doesn’t know whether he’s going to request a bailout,” Eurasia’s Barroso said.
Rajoy, in an interview published in the Frankfurter Allgemeine Zeitung yesterday before he hosted Merkel, called for a shift away from “orthodox thinking” to help Spain and others. While principles are important, “it’s also good to be flexible,” he was quoted as saying.
His ability to hold out will depend on his access to markets. The government, which said yesterday it has sold 77 percent of the bonds it plans to issue this year, faces 20 billion euros of bond redemptions in October.
“In our view, we expect the Spanish government to request such a program by early October at the latest,” economists led by Julian Callow at Barclays in London said in a note to clients yesterday. Italy “would also benefit from being in such a program,” they said.