While both have jointly argued against extra budget austerity as the price for help from theEuropean Central Bank, their interests diverge when it comes to whether they should ask for assistance together. A go-it-alone strategy by Spain would probably cut Italy’s borrowing costs while leaving Rajoy to weather the political flak of seeking emergency funds.
Mariano Rajoy, Spain's prime minister. Photographer: Jock Fistick/Bloomberg
“Rajoy was probably pressed by Monti in August to accept a pre-emptive” bailout, said Gilles Moec, co-chief European economist at Deutsche Bank AG in London. “It would have made things so much smoother in Europe and for Italy as well. Rajoy is very much following his own route now.”
European officials are waiting for Spain to trigger a bailout plan unveiled by ECB President Mario Draghi last month and designed to draw a line under the region’s debt crisis. While Draghi’s plan to buy potentially unlimited quantities of government debt has soothed markets for now, a botched Spanish rescue could still trigger further turmoil. Spanish and Italian bonds fell today, with the yield on 10- year Spanish debt rising 7 basis points to 5.66 percent at 10:02 a.m. while Italian 10-year yields advanced by the same amount to 4.97 percent.
Berlusconi Threat
Other potential sources of instability were highlighted over the weekend. In Italy, former premierSilvio Berlusconi cast doubt over the future of Monti’s government as he threatened to withdraw support for it. In Berlin, the Finance Ministry rejected a Der Spiegel magazine report that public creditors of Greece face losses. Meanwhile, Draghi stepped up efforts to soothe German concerns about bond purchases.
Monti and Rajoy, who will brief reporters in Madrid around 2:45 p.m. local time, meet less than a week after the Italian premier signaled that he would like Spain to jump first in asking for a full sovereign bailout. “One country that still has an elevated spread and has problems with its banking system has hesitated and is hesitating about whether to activate the anti-spread mechanism,” he said on Oct. 23. “This country, as you know, is not Italy.”
Rajoy’s Resistance
For his part, Rajoy has fended off calls to seek a rescue for almost three months, saying he’s still assessing whether it’s in the national interest. He has already asked European partners for as much as 100 billion euros ($129 billion) 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, will set out plans for establishing a bad bank, ordered by the European Union as a condition of the rescue, at 5 p.m. today in Madrid. With more than 200 billion euros of financing needed in 2013, Rajoy will probably request aid by the end of the year, says Tullia Bucco, an economist at UniCredit SpA (UCG) in Milan. Blackrock Inc. (BLK) Chairman Larry Fink said on Oct. 26 he expects Rajoy will cave in this week.
Spanish Bonds
Spain’s benchmark 10-year bond yield has fallen more than 100 basis points since its peak of 7.75 percent in August, just before Draghi vowed to do whatever it takes to save the euro. Even with the gain, the yield of 5.61 percent exceeds the 4.48 percent average over the past decade. Italy’s 10-year bond yield is at 4.97 percent.
As Spain debates whether to seek a bailout, 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 Spiegel reported yesterday that representatives of international creditors recommended that they take losses. Imposing a further write-off on Greek creditors would be “a bit unrealistic,” Finance MinisterWolfgang Schaeuble told German radio Deutschlandfunk on Oct. 28.
‘Not Uncontrolled’
International Monetary Fund Managing Director Christine Lagarde will meet with French President Francois Hollande today and German Chancellor Angela Merkel tomorrow. The IMF is part of the so-called troika of international creditors, along with the ECB and the European Commission. 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 Spiegel 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.” Telling the magazine “we take the worries of the people very seriously,” Draghi also said he saw no current risk to price stability and underscored the prospect of profits for German taxpayers from ECB purchases of debt.
Monti’s Woes
Monti faces his own difficulties as he prepares to confer with Rajoy. The political ground below him has begun to shake as a result of his predecessor’s objections to the impact of austerity on Italy’s economy. One day after being found guilty of tax fraud, Berlusconi said on Oct. 27 that his People of Liberty party must “decide whether to immediately withdraw our support of the government.” His party is the biggest in Italy’s parliament and one of two backing Monti’s almost year-old administration.
Such a step would probably force Italian President Giorgio Napolitano to call early elections. It could also fan Europe’s debt crisis because Monti’s fiscal policies have contributed to a decline in Italy’s bond yields, with markets more focused on Spain in recent months. “Although Berlusconi’s threat to end his support for Monti’s cabinet is part of an elaborate game of brinkmanship, it will refocus attention on Italy’s domestic woes,” Nicholas Spiro of Spiro Sovereign Strategy in London said in an e-mailed note. “The ‘Draghi effect’ has been breeding complacency on the part of investors, euro-zone policy makers and national politicians.”
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