Markets are wide awake this morning and trying to digest the latest. The single currency has been bid up higher since an article in the FT has declared that Spain is indeed ready to ask for assistance. Not a bailout mind you…a credit line. Seems like Spain will accept the conditionality that is attached to a bailout …excuse me credit line, in order to legally allow the ECB to go in and purchase their bonds in the open market in order to drive down their funding costs and relieve the financial pressure on the country. So effectively they are trying to re-tip the balances scales. The original conditionality of the ESM was the country needed to request assistance from the ECB and along with that comes certain bells and whistles namely the dreaded A word- austerity measures. However, this article refers to Spain requesting a credit line – may or may not use it and that will enable the ECB to start buying their bonds.
In an ideal world this just might work but it just all seems a little opaque and embarrassing to me. Spain doesn’t actually need a bailout ….yet. But the structural issues in their country tied with the personal and private de-leveraging that needs to occur from their banking sector over-exposed to a property bubble similar to what occurred in Ireland sure as hell puts them in the category for needing one. Add to that 25% unemployment 50% of which is youth unemployment and its not hard to see why Spanish government bond holders demand close to 6% interest for the risk of lending them money. It is hard to see why Rajoy is so caught up in not requesting help for his country when they do in fact need it, I certainly hope its not to protect his own job.
The article goes on to say that the reason Spain has not been as forthcoming in requesting assistance is due to the complications it causes for other nations or complications being caused by other nations. So basically a standard ” Not me guv’.” It is true that Germany has slowed things down recently as it is a tough sell to their parliament. Italy’s name gets tarnished here as well as they try figure out the implications of Spain requesting assistance on Italy. I have argued here before that Italy does not have a problem with personal debt and a banking system overrun with bad loans, what it has are competitive issues which don’t neccasarily require bailout assistance but do probably require austerity measures and a firm hand towards unions.
Quote of the article is “the credit line is not fundamental, it is circumstantial,” Absolute tosh. Circumstances have caused this credit line (bailout) to be fundamental.
The Euro saga rolls on and again instead of action we have more political manoeuvring, gets very tiresome. “Spain believes the effect on financial markets of a request would be such that it could be enough on its own to cause a sharp drop in its borrowing costs” and at the time of typing Spanish yields on their 10 year bond is 5.834% which is higher than yesterday. So if Spain thinks that merely showing that they are prone to asking for help will solve their problems they better have a very solid plan B.