Everybody is waiting for a formal aid request for Spain. The ECB made progress in its internal work for bond buying. Germany is giving its nod to the plan, despite loud opposition from the Bundesbank and some politicians. Will Spain say I do?
Making a U-turn in policy is hard, and the Spanish government has taken its time between opening the door and walking through it. Taking the time is fully understandable for preparing the public. However, seeing what happened to other “bailed out” countries, Spain certainly has reasons to fear.
After ECB president Mario Draghi announced a plan to buy bonds, he also said that internal ECB committees would work on it. Announcing committee work often means that the idea will be buried. However, according to reports in Der Spiegel, work has indeed been done to prepare a scheme for bond buying that will cap yields or spreads of countries asking for help.
Another worry was German opposition: Draghi didn’t hide that one “reservation” was made – that of Jenn Weidmann, the head of the Bundesbank. The German central bank continued to voice its opposition to the bond buying in several occasions. Also Germany’s finance minister Wolfgang Schäuble seemed very reluctant, to say the least.
Yet also in this front, there is some news: the other German member of the ECB, Jörg Asmussen, has given his public support to the move. Asmussen is close to Chancellor Angela Merkel, making his approval a quiet backing from Germany.
Spanish PM Mariano Rajoy, held a press conference after Draghi’s announcement. After taking his time with hailing his government’s achievements, he didn’t rule out a bailout request, but said he first wanted to see what the ECB had in store.
This seems to be a “game of chicken” with Europe that favors Spain in the meantime, as its bond yields began falling. This isn’t only a game of chicken.
A formal aid request would mean some “conditionality” or more austerity. Rajoy doesn’t want to walk in the same path as Greece, Ireland and Portugal, who receive periodical visits from the troika. This is too humiliating for this big country that denied an option of a bailout for so long.
Asking for a bailout is entering a Blood Wedding with the inspectors – quite scary given the downwards spiral the “bailed out” countries encounter.
According to some reports in the Spanish press, the government has been secretly negotiating the terms to make austerity softer and more politically acceptable. Spain has already taken quite a few steps and announced others, including the VAT hike which was a complete U-turn
. But, making the political sacrifice now may work out in the future, as lower funding costs will help the economy. Austerity on the other hand, isn’t that helpful.
Now that work has been done in Berlin and Frankfurt, is Spain ready for its part?
Further reading: How to trade the Greek exit with EUR/USDGet the 5 most predictable currency pairs