Italy, Spain to Shun Aid Unless Yields Jump, Polillo Says

Italy and Spain won’t request bailouts unless a new surge in bond yields leaves them shut out of markets, as no government will voluntarily accept conditions imposed for the aid, a senior Italian government official said.

“There won’t be any nation that voluntarily, with a pre-emptive move, even if rationally justified, would go to an international body and say, ‘I give up my national sovereignty,’” Gianfranco Polillo, undersecretary of finance, said in an interview in Rome late yesterday. “I rule it out for Italy and for any other country.”

Italian and Spanish 10-year bond yields have dropped more than one percentage point since European Central Bank President Mario Draghi first signalled on Aug. 2 that the bank would buy debt of distressed euro-region nations in tandem with the European Union’s bailout funds. While Italian Prime Minister Mario Monti championed the EU bond-buying plan, Draghi’s insistence on imposing conditions on any aid has left Monti and Spanish Prime Minister Mariano Rajoy reluctant to make a request.

The program “will be activated only when the single countries have the water up to their necks,” Polillo said.

Italy’s 10-year yield rose four basis points to 5.03 percent as of 3:45 p.m. Rome time, down from a peak of 7.5 percent on Nov. 9. Spain’s benchmark fell one basis point to 5.70 percent. It reached a euro-area high of 7.75 percent on July 25.

Monti-Rajoy Meeting

Monti and Rajoy agreed on the need for European policy makers to keep working in order to stabilize financial markets, according to a statement from Monti’s office following a meeting between the two leaders in Rome today.

High yields are weighing on the two nations’ public finances, jeopardizing efforts to contain budget shortfalls. Italy now expects a deficit of 2.6 percent of gross domestic product this year, up from a 1.7 percent forecast in April.

Spanish Deputy Prime Minister Soraya Saenz de Santamaria said this week that Spain will consider seeking a bailout if the conditions imposed are acceptable.

Should a country hit the aid button, the related “procedures would be very heavy from both a political and economic point of view” and any conditionality would carry uncertainties, said Polillo, who serves as a deputy to Finance Minister Vittorio Grilli. He added that he isn’t aware of any pressure from other countries on Italy to seek external aid.

An increase in political risk in the run-up to general elections due by the end of April, could also increase the chance that Italy would be forced to seek support, Polillo said. Polls suggest that the vote may fail to produce a stable majority or may lead to a government that’s not committed to Monti’s reforms.

Monti Running?

The parties backing Monti’s unelected government may need to form a coalition after the next elections, according to a Sept. 3 poll by IPR Marketing. The projection was based on an Aug. 31 survey and takes into account proposals for a new election law currently being discussed by lawmakers in Rome.

Monti’s approval rating rose this month amid optimism on the outlook of the euro-debt crisis, a separate poll by Rome-based IPR on Sept. 17 showed. The premier’s rating climbed three percentage points to 52 percent from the previous survey.

The risk of a hung parliament would increase if politicians don’t succeed in reaching an agreement on a new election law that ensures governability, Polillo said. Monti has said he won’t run in the election.

“Should the markets perceive some political uncertainty, they would anticipate a negative judgment on Italy,” Polillo said. “Spreads would rise and would force us to activate” the bond-buying procedure. “I hope that responsibility prevails and a new electoral law will be made in order to guarantee more governability to this country.”

A political stalemate may also increase the chance of Monti staying on. Should elections fail to produce an outright majority, raising the possibility of another election as happened in Greece earlier this year, “even a person like Monti, who so far has said that he’s not willing to be a candidate for premiership, would be available to” run, Polillo said.