Rajoy Faces Bailout Split With Monti at Madrid Meeting

Spanish Prime Minister Mariano Rajoy
Mariano Rajoy, Spain's prime minister. Photographer: Jock Fistick/Bloomberg

Italian Prime Minister Mario Monti and his Spanish counterpart Mariano Rajoy tried to mask a growing divide over Europe’s new bailout strategy by emphasizing their commitment to the timetable for banking union.

While both urged their European partners to meet a year-end deadline to establish a single banking supervisor, strains emerged when a Spanish reporter asked Monti whether he would request a bailout alongside Rajoy. The Italian premier pushed back against formalizing ties between the nations and signaled Spain will probably have to go it alone in negotiations with the gatekeepers of Europe’s rescue money.

“The collaboration with Spain has been very useful, same as with France, but also with Germany,” Monti said at a joint press conference in Madrid today. “Without prejudice to the decision of any other country, we don’t believe Italy is in a condition to need to” ask for help.

European officials are waiting for Spain to trigger a bailout plan unveiled by European Central Bank President Mario Draghi last month and designed to draw a line under the region’s debt crisis. Monti would probably benefit from lower borrowing costs if Spain brought the ECB into play, while leaving Rajoy to weather the political flak of seeking emergency funds.

‘Jiggery Pokery’

“This is a little bit of jiggery pokery between Europe’s two big problem countries,” George Magnus, senior economic adviser at UBS AG in London, said in a Bloomberg Television interview before the press conference. “Structurally, Spain is still deteriorating. Its funding position will become much more difficult in 2013 as the investor base begins to fade away.”

Spanish and Italian bonds fell today. The yield on 10-year Spanish debt rose 7 basis points to 5.66 percent at 4:28 p.m. in Madrid while Italian 10-year yields advanced 10 basis points to 5 percent. The current Spanish yield exceeds the 4.48 percent average over the past decade.

Rajoy stood up to those, including Monti, who have leaned on him in recent weeks to request aid and tried to play up the support of his Italian counterpart.

“As soon as I think it’s good for the general interests of Spain to ask for it I will ask for it; while I don’t think that, I won’t,” he said. “Spain and Italy are more united than ever.”

Monti repeated the idea he raised on Oct. 23 that the European crisis-fighting effort would benefit from the startup of the ECB’s bond-buying program.

Timing Guesses

“It’s very important, now that the guidelines have been laid out, that this instrument works and it’s not just a theoretical solution,” he said. “We don’t think Italy has to activate this.”

With more than 200 billion euros ($258 billion) of financing needed in 2013, Rajoy will probably request aid by the end of the year, says Tullia Bucco, an economist at UniCredit SpA in Milan. Blackrock Inc. Chairman Larry Fink said on Oct. 26 he expects Rajoy will cave in this week.

Rajoy has already asked European partners for as much as 100 billion euros to prop up banks hobbled by the collapse of the country’s real-estate bubble. The resulting recession has pushed the jobless rate to 25 percent.

The Bank of Spain’s deputy governor, Fernando Restoy, today set out plans for establishing a bad bank, ordered by the European Union as a condition of the rescue.

Greek Woes

Spain’s benchmark 10-year bond yield has fallen more than 200 basis points since its peak of 7.75 percent in August, just before Draghi vowed to do whatever it takes to save the euro.

As Spain debates whether to seek a rescue, officials are still struggling to find a solution for Greece, the epicenter of Europe’s crisis. In the fifth year of recession, Greek leaders are trying to agree on labor reforms and other structural changes in a bid to qualify for more aid under a rescue that has included the biggest write-off of privately held debt.

Euro-region finance ministers will hold a conference call on Greece on Oct. 31, and Der Spiegel reported yesterday that that the troika -- the ECB, the International Monetary Fund and the European Commnission -- proposed a restructuring that would require public-sector lenders to take losses.

Imposing a further write-off on Greek creditors would be “a bit unrealistic,” Finance Minister Wolfgang Schaeuble told German radio Deutschlandfunk on Oct. 28.

German officials are trying to damp down the prospect of more money for Greece as voters question the wisdom of the latest drive to end the crisis. Draghi, who visited Germany’s parliament last week to defend his bond-purchase plan, used an interview with Spiegel to follow up that diplomatic initiative.

“Unlimited does not mean uncontrolled,” he said in the interview released yesterday. “We will only buy bonds from those countries that accept strict conditions, and we will check very carefully whether those conditions are adhered to.”

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