Just last Thursday, the European Central Bank outlined plans to buy sovereign debt (bonds) from EU member states that were being forced to pay unsustainable and, in the bank’s opinion, unrealistic interest rates to finance their borrowing requirements from the market. The fact that the ECB was willing to “backstop” Eurozone states in this manner was enough to push the Euro and markets higher and to reduce borrowing costs for Italy and Spain. It must be remembered that the plan was just being announced and that no nation had yet benefitted from the new policy.
As ever, the devil is in the details. Mario Draghi, ECB president, made it clear that the support would only be available to member states that had become recipients of an EU/IMF bailout package, currently: Greece, Ireland and Portugal. Such bailouts have been conditional on the recipient nation agreeing to monitoring by the “troika” of the EU/IMF/ECB to ensure that conditions attached to the bailout are being adhered to and economic progress is being made.
Spain is widely thought of as being the next country in line for an EU/IMF bailout should its borrowing costs hit unsustainable levels. Spain has long been at pains to point out that it does not need a bailout and that it has undertaken the necessary economic and social reforms required to get its deficit under control. Spanish PM, Mariano Rajoy, told a TV audience that he would not accept outside conditions over a possible bailout – whilst stressing that no decision had been taken to ask for such a bailout. Given that the Eurozone crisis was largely one of confidence, this seems a remarkably short-sighted position to have taken. In the event that Spain did find itself in need of external support, investors could not be certain that Spain would benefit from ECB support since its PM is publicly stating that external conditions which have been attached to all such support would be unacceptable.
It is to be hoped that in these calmer times, Spain will be able to fund its borrowing needs through the markets at reasonable rates. Should it not be possible, Spain would only get the financial support from its EU partners if it agreed to conditions attached to the bailout; so the PM’s comments could perhaps be put down to rhetoric for a Spanish audience rather than a hard and fast statement of policy.