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Spain's Rajoy sets condition for bailout
PM Mariano Rajoy says he will consider bailout if Europe's central bank fleshes out plans for government bond purchase.
Last Modified: 03 Aug 2012 20:03
Rajoy, right, and his Italian counterpart Mario Monti have vowed to work together to solve the debt crisis [AFP]

Spain's prime minister has said he will only consider asking for financial aid for his country once the European Central Bank (ECB) has expanded its crisis-fighting plans for buying government bonds.

This is the closest Mariano Rajoy has come to admitting he is considering a bailout after months of denials.

Speaking to reporters on Friday, Rajoy urged Europe's leaders and the ECB to speed up the introduction of key reforms to fight the debt crisis and strengthen the struggling banking sector.

"I haven't made a decision [on a bailout] yet,'' Rajoy said after a cabinet meeting. "I want to know what the unconventional measures proposed by the ECB are. We do not know what is being proposed."

"I will do what I always do, act in the best interest of Spaniards," he said after calling for a crisis meeting of the region's finance chiefs.

Rajoy's comments came a day after the ECB warned it would only help lower a country's borrowing costs if that country's government applied for rescue aid from the rescue funds set up by the 17 countries that use the euro.

Borrowing costs

The ECB's announcement initially sent Spain's borrowing costs spiralling again as investors expressed their disappointment and continuing concern over whether Spain can manage its finances and pay its debts.

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Spain borrowing costs have risen sharply for all bond types in recent months as the uncertainty over whether the country can afford to contain the problems in its banking sector and indebted regional governments has continued unabated.

The interest rate, or yield, on Spain's benchmark 10-year bond was at 6.82 per cent just after Rajoy spoke - close to the seven per cent level, which many market-watchers consider unsustainable in the long term.

Such rates could likely push Spain to seek a bailout, deepening Europe's financial woes and sending repercussions to economies beyond the continent.

The yield had dropped to 6.5 per cent last week after Mario Draghi, the ECB president, first suggested he would apply measures that would help ease the pressure on borrowing costs. By comparison, the rate demanded by investors for Germany's more trusted 10-year bond was 1.34 per cent.

Rajoy also said that he had sent a letter to Herman Van Rompuy, the European Council president, and his European Commission counterpart, Jose Manuel Durao Barroso, urging for recent proposals for greater EU banking union to be approved in December.

Toxic assets

"If we really want to speak of a political project, a project for the cohabitation of millions of citizens, disparities in financing of this calibre, that does not happen in any currency zone in the world,'' Rajoy said. "It is impossible, so it is important that this matter is resolved.''

 Pressure mounts on the European Central Bank

Spain's benchmark Ibex 35 stock index fell after opening but rallied upward in the afternoon to gain back the losses it suffered after Thursday's ECB's announcement.

Spain has been already granted a loan of up to $123bn for banks laden down with toxic assets following the bursting of a real estate bubble in 2008.

Progress on EU banking and fiscal unity could help it get that money passed straight to the banks soon and not form part of its already heavy sovereign debt burden.

Greece, Ireland, Portugal and Cyprus have already sought bailouts but a Spanish sovereign rescue package would test the European Union's funds as it is the fourth largest economy of the 17 nations using the single euro currency.

Spain is in its second recession in three years with an unemployment rate of nearly 25 per cent.

But many of its 17 regional governments are now starting to run out of money while austerity measures and labour reforms brought in to try to calm financial markets and appease EU partners are stifling the economy.

Strikes and protests have become almost a daily feature. On Friday, some 500 trains were cancelled as rail workers staged a one-day strike to protest a proposed restructuring of the sector. The stoppage came at the beginning of
one of Spain's biggest holiday months.

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Source:
Agencies
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