As highlighted in September’s outlook, the tensions between Catalonia and Spain significantly worsened. The independence aspirations of the rich region joined Spain’s endless issues.
Nevertheless, Spain hasn’t officially asked for a bailout from the EU, even after the ECB prepared its OMT program especially for Spain. Without a Spanish aid request, the ECB will not buy Spanish bonds, and the Spain’s debt crisis will intensify. Will it happen in October? There are better chances now.
Why hasn’t Spain asked for a bailout?
- Improving market conditions: Since Draghi said he would “everything to save the euro”, and especially after the OMT was presented in early September, yields on Spanish bonds, both the OMT range of 1-3 years and also at longer maturities (including the benchmark 10 year bonds) have fallen. Spain managed to raise money at the markets at more favorable rates. Lower rates mean less urgency to ask for aid.
- Regional elections: Spanish PM Mariano Rajoy is from the northwestern region of Galicia. His ruling PP party currently controls the region, but it isn’t doing so well in the polls towards the elections on October 21st. Rajoy is reportedly delaying the request until after the elections, in order to increase the chances of victory.
- Understanding the conditions: This is the official stance of the Spanish government, and it makes a lot of sense: Spain doesn’t want to submit a request and eventually finding itself with the “Men in Black”, aka the troika that will add even more cuts to the current austerity policy. If conditions are pre-negotiated, it will be easier to swallow for both the government and the public.
- Dealing with one issue at a time: Rajoy made a U-turn in policy by raising the VAT: the medium level was upped from 8% to 10% and the higher one from 18% to 21%. In addition, many products moved to the higher level, making the jump 13%. Together with other cuts, this caused outrage that attracted many people to the streets of Madrid. Asking for a bailout is another policy shift and the public outrage could be too much. With the situation in Catalonia also very tense, Rajoy might prefer to wait with the bad news to a more convenient time.
- German calculations: German finance minister Schäuble surprised by discouraging Spain to take a bailout while France, other countries and the markets do expect to see such a move. According to some reports, Germany doesn’t want to bring the actual usage of the ESM with the Spanish bailout to the parliament, as the topic of bailouts is sensitive also in Germany.
Why could Spain ask for aid in late October? Basically, all the issues that caused a delay would be removed.
- Market conditions will become less favorable for Spain – they are gradually worsening.
- Internal elections will be over
- Background negotiations between Spain and EU peers will have materialized.
- The Spanish public will be ready.
- Germany will be ready.
The main thing to watch is Spanish yields: if they soar once again, Spain will make a move sooner than later. Making a move under pressure means less favorable conditions, but this is what happened with other countries as well.
This article is part of the October monthly forex outlook. You can download the full report, including the currency technical outlooks and the relative strength index by joining the newsletter in the form below.
Further reading: Greek Crisis: Systemic Can Kicking
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