Bloomberg News

Rajoy Will Consider Bond Buying Request to Protect Spain

August 03, 2012

Spain’s Prime Minister Mariano Rajoy

Spain’s Prime Minister Mariano Rajoy said he would consider asking the euro region’s bailout funds to buy Spanish debt if it was for the best of the country. Photographer: Angel Navarrete/Bloomberg

Spain’s Prime Minister Mariano Rajoy said he would consider asking Europe’s bailout funds to buy Spanish debt if it were for the best for the country, as he called for a crisis meeting of the region’s finance chiefs.

“I will do what I always do, act in the best interest of Spaniards,” Rajoy said at a news conference in Madrid today, when asked whether he would consider making a request. He needs to see more details on what the European Central Bank is planning in terms of bond buying and non-conventional measures before taking any decision on seeking support, he said.

Spain and Italy’s borrowing costs surged yesterday after ECB President Mario Draghi outlined a plan under which the central bank might buy debt in tandem with the euro governments’ bailout fund, while saying the details still need to be worked out over the coming weeks. Countries would have to request help and commit to strict conditions in return.

Rajoy called for a meeting of euro group finance ministers “as soon as possible” to take measures to “guarantee the irreversibility of the euro,” he said in a letter to European Union President Herman Van Rompuy released by his office today. Any action on bond markets designed to bring down borrowing costs must be “deep, strong and sustained over time,” as previous efforts have failed, he said.

Euro-area finance chiefs will meet on Sept. 3 to discuss possible Spanish bond buying and the economic situation in Greece, news agency Ansa reported, citing unidentified European officials.

Unacceptable Yields

Spain’s 10-year bond yield fell as low as 6.84 percent after Rajoy spoke, after earlier reaching as high as 7.44 percent. That compares with 6.05 percent for a similar Italian maturity and 1.35 percent for 10-year German debt.

Investors may have missed the significance of Draghi’s remarks in saying that the ECB is prepared to intervene to bring down soaring interest rates, Rajoy said. He praised Draghi for saying that risk premiums investors demand to buy bonds of Spain and Italy were “unacceptable.”

Still, Rajoy, who declined to say whether he would apply for help at a joint press briefing with Italian Prime Mario Monti yesterday, said he needs more details before deciding whether to trigger support. The European Financial Stability Facility can buy bonds on the market if nations ask for it, and the European Stability Mechanism, the permanent successor aid fund that is awaiting final approval, will also be able to.

Draghi’s Methods

It remains to be seen whether the measures outlined by Draghi will be sufficient, Rajoy said.

“What do they plan to buy in the secondary market? Six- month bills or 10-, 5-, 7-year bonds? Obviously it’s not the same,” he said. “Which mechanism will be used? The ESM that doesn’t exist? What are the methods that Mr. Draghi said yesterday they would announce? We don’t know.”

“The fact that Mr. Rajoy is paying attention to those details shows that the Spanish government might not be that far from requesting additional support,” Ricardo Santos, a European economist at BNP Paribas SA in London, said by e-mail. “Given that the biggest liquidity needs for Spain will come later in October, the Spanish government feels that it has some time on its side before requesting for support.”

Debt Redemptions

Spain has 29 billion euros ($36 billion) of debt redemptions in October, according to data from the Treasury. It has 16 billion euros of bills coming due before then.

Spanish bond yields have soared in recent weeks amid the country’s deepening recession, yawning budget gap and struggling banks, rising above the 7 percent level that prompted Greece, Ireland and Portugal to seek bailouts. Spain won approval last month for as much as 100 billion euros ($123 billion) in aid for its banks, fueling concern the country would need a full sovereign rescue and spreading debt-crisis contagion to Italy.

Spain asked for aid to recapitalize its banks and “dissipate doubts and restore the flow of credit,” Rajoy said. “I did it because I thought it was in the best interests of Spaniards.”

Rajoy “maintained a stance of ‘constructive ambiguity’ on European assistance,” Thomas Costerg, an economist for Standard Chartered in London, said in an e-mail. “Our view is that Spain will request a bailout in the coming weeks, as it is key to ensuring ECB market support.”

Budget Cuts

Rajoy reiterated that his government won’t shy away from austerity measures needed to bring the country’s budget deficit within the euro-region’s limit of 3 percent of gross domestic product in 2014, saying Spain could no longer continue spending more than it took in.

“These measures aren’t pleasant and the government is aware that these measures aren’t popular,” he said. “Everything is open to discussion, but what isn’t debatable is that there is the need to cut spending and increase revenue.

The Cabinet also approved a budget plan through 2014 to be submitted to the European Commission. The document details 102.1 billion euros of spending cuts and tax increases to reduce the nation’s budget gap, the third-largest in the euro zone, to 2.8 percent of GDP by 2014 from 8.9 percent last year.

The European Commission welcomed the plan and will analyze it “in detail,” spokesman Antoine Colombani said by e-mail.

To contact the reporters on this story: Andrew Davis in Rome at abdavis@bloomberg.net; Angeline Benoit in Madrid at abenoit4@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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