Spain Bailout Caution Grows as Business Lobby Backs Rajoy

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

Spain’s biggest business lobby is getting as cautious as Mariano Rajoy’s government on a possible bailout request because of concern how stringent conditions might be to trigger European Central Bank bond-buying.

A rescue “could impose a criminal pace of reduction in public spending,” Alberto Nadal, vice secretary-general of CEOE, Spain’s main business group, said in an interview.

The group’s newfound skepticism contrasts with their earlier support for a request following the ECB’s unveiling of its bond-buying program in September after President Mario Draghi committed to do “what it takes” to save the euro. Rajoy has refrained from seeking such aid and pressure on him to do so has eased, with the yield on Spain’s 10-year bonds now 219 basis points lower than in July.

“The euro group isn’t a nearly purely technical body like the International Monetary Fund, it is made of representatives of governments that very often need to sell measures to their parliaments, so you can’t tell the outcome,” Nadal said.

Until recently executives of CEOE, which says it represents two million companies, together with the research institute it is linked to, Instituto de Estudios Economicos, or IEE, were calling on the government to request a bailout.

Yields Fall

The IEE said on Oct. 22 that the sooner Spain asked for aid the better, as Spanish companies were suffering from more expensive funding than those in other euro countries. CEOE Vice Chairman Arturo Fernandez on Sept. 7 said that “time was running out” for Spain because the nation was on the verge of bankruptcy.

Since then, the yield on Spain’s 10-year benchmark bond has fallen to 5.56 percent at 5:59 p.m. in Madrid today, from a euro-era record of 7.75 percent on July 25, a day after Spain agreed to conditions for a 100 billion-euro ($129 billion) European rescue-fund credit line to recapitalize its banking sector and a day before Draghi opened the door to bond purchases.

“You can’t share the single currencies and not having the same financial conditions in the overall and the possibility unique central bank to set monetary policies in the area,” Rodrigo Rato, a former managing director of the IMF and former Spanish finance minister, said in a Dec. 7 with Bloomberg Television interview.

Difficult Year

Still, the euro fell toward a two-week low against the dollar today after Italy’s prime minister said he intends to resign, rekindling speculation a change in government will derail efforts to solve the nation’s debt crisis.

Italy’s instability can affect Spain, Budget Minister Cristobal Montoro said. Next year will be difficult for Spain as the government’s priority will be to recover its funding capacity, according to a statement by the Budget Ministry citing comments made by Montoro in senate today.

Economy Minister Luis de Guindos said that the ECB has provided “significant relief.” The government “will take the decision that is the best for our interests, not only from the point of view of the decision itself but also from the point of view of timing,” de Guindos said in an interview with Radio Cinco in Madrid. “Timing in economy, in politics and even in music is important and the government has to take the best decision at the best moment possible.”

ECB Conditions

Draghi on Dec. 6 reiterated there would be “no automatic support” from the ECB. Governments “know what the conditions are,” he said, referring to the monitoring associated with any request to the ESM rescue fund. “This is going to be a necessary, but not sufficient condition” as the ECB will make its own assessments, he said.

Encouraged by the impact of the ECB’s announcement on borrowing costs, business leaders share Rajoy’s optimism that the five-year slump is reaching a low and that measures to overhaul the economy will pave the way to a recovery next year, with already resilient exports and declining labor costs helping resorb Spain’s current account deficit.

“In these kind of bailout agreements, one can only enter with extreme caution,” Joaquin Trigo, the IEE’s managing director, said in an interview in Madrid. “After what happened in Portugal and Greece we have to be very careful, because they give you the money but some of the things that were imposed lacked economic rationality.”

‘Fiscal Discipline’

The so-called troika, consisting of the IMF, the European Commission and the ECB, demanded tax increases to boost revenue and wage cuts to cut the euro area’s highest deficit when Greece got the first bailout in May 2010. The demands have driven the country into a deep recession, with unemployment soaring to a record 26 percent in September, the highest in the euro area. Greece’s economy has contracted for five years and is set to do so again next year.

The Portuguese government this year sold Banco Portugues de Negocios SA to Banco BIC Portugues SA of Angola for 40 million euros, a fraction of its 180 million-euro asking price, after the bailout and restructuring of the lender seized by the state in 2008 was approved by European Union regulators.

“Fiscal discipline is the key to recover credibility and cheaper funding,” said Ofelia Marin-Lozano, head of economic studies at the pro-entrepreneur lobby Circulo de Empresarios. “That means imposing self-discipline on oneself which if you don’t do, ends up being imposed from outside.”

CEOE’s Nadal warned of the danger of introducing measures that could harm the economy.

“Reducing the deficit is necessary to make public debt sustainable and adjust an oversized public sector,” Nadal said. “Another thing is to destroy the social safety net or essential public services, one has to be very measured.”

‘Little Benefit’

Spain has no interest in entering a complex program negotiation process “for very little benefit or none at all,” he said. The discussions on financial assistance for Spain’s banking recapitalization left “a bittersweet taste,” according to Nadal. “It’s certainly a surprise that Finland requested from Spain the same guarantees as it asked from Greece.”

As Europe’s debt crisis has worsened, Finland has toughened its stance on supporting rescues amid slowing economic growth. Finnish Prime Minister Jyrki Katainen and Finance Minister Jutta Urpilainen have called for stricter rules, resisted shared liability for debt and demanded collateral in exchange for bailouts since winning April 2011 elections.

The northernmost euro member is the only one to have demanded collateral in exchange for aid that doesn’t give it senior creditor status.

‘Poker Game’

Nadal said Spain should only make the request in case of an emergency since ECB funding isn’t guaranteed. “If you give this a little time, it should be enough to recover markets’ confidence,” he said. “Its better to try and let things go their own course rather than enter in a program at any cost.”

Northern countries may add conditions if Spain requests assistance because “they are basically saying this is a transfer of income from their workers’ savings there to spendthrift people in the south,” Nadal said.

“Many people are very worried but the government is playing a poker game and it has a lot of information on the table,” said Ricardo Gomez-Barreda, president of the lobby Fundacion Impuestos y Competividad, a private foundation that carries out research on tax regulation and is mainly funded by legal service and consultancy companies. “We can only hope it is right, and that it’ll know when to show its cards first.”

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