Rajoy Says Europe Shouldn’t Dictate How Spain Cuts Gap

Spanish Prime Minister Mariano Rajoy faced pushback from his visiting Finnish counterpart, Jyrki Katainen, over the next steps in fighting the debt crisis.

Katainen, speaking Madrid today before meeting Rajoy, said Spain should try to avoid tapping central bank aid and Finland may press for “concrete measures” to reduce the deficit as a condition for any support. Rajoy late yesterday said he would reject specific policy conditions set by the European Union or the European Central Bank for buying the country’s bonds.

Katainen joined German Finance Minister Wolfgang Schaeuble in deterring Rajoy from activating the ECB’s bond buying program as resistance to the plan set out by central bank president Mario Draghi coalesces. The Spanish premier last night pledged that Spain will meet its targets for reducing its budget shortfall this year and next and defended his government’s right to set spending limits on individual policies.

“We all have to work hard in avoiding packages,” Katainen said when asked about bailout conditions. “The deficit target is not probably the best possible target. Concrete measures to improve competitiveness and concrete measures cutting the deficit and cutting debt development are more important.”

Spain’s 10-year bonds rose, sending the yield down 1 basis points to 5.69 percent at 3:58 p.m. in Madrid.

Protecting Pensioners

Rajoy said last night he still aims to protect Spanish pensioners from suffering cuts in their benefits and may be able to repair some of the election pledges he’s broken before he has to face voters again in 2015.

“We need to meet the budget deficit commitment, which is the most important challenge we have as a country,” he said in his first television interview since taking office in December. “I won’t accept them telling us which are the specific policies where we have to cut or not.”

He said his government still needs time to study the ECB’s plan to buy bonds of struggling euro-area members before deciding whether to request aid since the pledge of support has already lowered Spain’s borrowing costs. The yield on the country’s 10-year bond fell more than 100 basis points last week, with most of that decline coming after Draghi laid out his plan on Sept. 6.

Deficit Slippage

“We’re talking about a game of bluff here,” Charles Dumas, chairman of Lombard Street Research Ltd., said today in an interview on Bloomberg Television’s ‘Surveillance’ with Tom Keene. Should Spanish “bond yields head north again because of no action, then the ECB may find itself forced just to hold the thing together to do whatever it takes, to use Mr Draghi’s own words.”

Schaeuble told lawmakers in Berlin yesterday Spain doesn’t need a full sovereign bailout, according to two party officials who participated in the briefing. Schaeuble praised Rajoy’s work on reforming the economy, saying the progress he’s made means that a full bailout isn’t necessary, said the officials who asked not to be identified because the briefing was private.

Bond Rally

Spanish bonds rallied last week after Draghi said the central bank will buy unlimited quantities of sovereign bonds as long as governments in countries such as Spain and Italy request aid from Europe’s rescue funds and sign up to strict conditions.

Katainen expressed his view on bailout terms at a joint press conference with the Spanish premier this afternoon when he said measures to boost competitiveness should also be a condition of any bailout. Rajoy announced a plan to increase taxes on short-term capital gains at the briefing.

The Spanish leader last night said that breaking a string of promises he made to voters on taxes and benefits when they chose him to lead the country in November didn’t undermine the legitimacy of his government and said he may be able to reverse policies such as raising sales tax and cutting unemployment benefits before the next vote.

“These are measures that can be recovered over the length of the legislature,” he said. “They gave us a mandate to recover economic growth for Spain.”

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