Spain has been deterred from triggering the currency union’s rescue mechanisms because of concerns about how, and even whether, the process would work, Deputy Prime Minister Soraya Saenz de Santamaria said today.
“We need to have all the elements on the table and also the certainty that it would materialize” before making a bailout request, Saenz said at press conference in Madrid following the government’s weekly Cabinet meeting.
Her comments help explain why Spanish officials have sought to damp expectations of a bailout request amid rising criticism of their plans to tame the budget deficit. Prime Minister Mariano Rajoy has said he is considering a request for European Union bond buying to try to bring down borrowing costs that remain more than 100 basis points above their average for the last decade.
EU deficit enforcer Olli Rehn and Spanish central bank governor Luis Maria Linde this week both questioned the math that the government says will deliver the country’s deficit-reduction commitments over the next 15 months. Spain’s high funding costs are complicating the debt-reduction effort.
“There is a rising fear that the 2013 budget and the stress tests may have been some sort of window dressing to get European assistance,” Thomas Costerg, an economist at Standard Chartered Bank in London, said yesterday by e-mail.
Spanish bonds rose for the first day in three, with the 10-year yield falling 21 basis points to 5.69 percent as of 3:44 p.m. in Madrid. That is down from a euro-era record 7.75 percent on July 25, though still 134 basis points more than the average over the past decade. The spread to German bunds narrowed 29 points to 417 points while the differential over Italian debt closed by 12 points.
While European Central Bank President Mario Draghi said yesterday the ECB is ready to start buying bonds of sovereigns that qualify for aid, officials from Spain, Germany and now the EU have damped expectations of a rescue this week. Rajoy, who meets his French and Italian counterparts in Malta today, on Oct. 2 denied reports a rescue request would come this week. Economy Minister Luis de Guindos last night said no bailout was needed.
Rehn, the European commissioner in charge of policing budget rules, told Spanish officials their plans to reduce the budget shortfall to 4.5 percent of gross domestic product next year are based on excessively optimistic assumptions about economic growth, two people familiar with the issue said. Bank of Spain chief Linde, who met Rehn on his Oct. 1 visit to Madrid, echoed that view in comments to lawmakers yesterday.
Spain’s 2013 budget assumes the economy will shrink 0.5 percent, less than the 1.3 percent median contraction predicted by 21 analysts surveyed by Bloomberg. Linde, the Bank of Spain chief, said targets were “certainly optimistic” in testimony to the parliament’s budget committee.
“The macroeconomic assumptions underlying the budget shouldn’t be a source of uncertainty and lack of credibility,” Deputy Finance Minister Fernando Jimenez Latorre argued when he took his turn in front of the committee today.
Weaker economic performance would widen the deficit, forecast at 6.3 percent of GDP in 2012, forcing the government to impose more austerity or plead for a looser target. Spain has been let out of its 2013 commitments before. European governments in July raised the deficit target from 3 percent.
Latorre said a larger-than-expected contraction next year won’t affect Spain’s ability to meet its budget commitments. Spain is still analyzing the possibility of asking for a bailout even though the procedures involved are “complex,” he added.
De Guindos’s deputy praised central bankers from the U.S., the U.K. and Japan who bought sovereign debt to support their economies without imposing conditions on governments and said distortions in Spanish yields that the ECB has acknowledged should be corrected as soon as possible.
Linde urged Rajoy to prepare additional austerity measures to ensure Spain meets the deficit obligations, which may determine whether EU officials grant financial support.
“Given the importance of achieving this, additional measures that would make it possible should be considered,” the governor said.
The 2013 budget, released Sept. 27, included the fifth set of tax increases and spending cuts since Rajoy took office in December. Public opposition has grown fiercer each time, climaxing last week with two days of protests in Madrid.
Already tapping as much as 100 billion euros ($130 billion) in aid to overhaul its banks, Spain is considering a broader European support package to shore up the government’s finances.
The ECB’s offer of unlimited bond purchases “helped to alleviate tensions over the past few weeks,” Draghi said yesterday after the monthly meeting of the ECB’s governing council. “Now it’s really in the hands of governments.”