Following last Thursday's press conference and interest rate
decision, Spain may need to submit to a full sovereign bailout to
receive any further European support for its finances. The news
follows weeks of discussion over the mechanics of a banking sector
bailout for Spain, which would add approximately $123 billion of
additional debt to Spain's finances.
Last week, European Central Bank President Mario Monti said that
the Bank stands ready to purchase bonds on the secondary market
should nations submit to European programs. By programs, he meant a
full sovereign bailout and effectively the giving up of fiscal
sovereignty for nations such as Spain and Italy. The two would
follow the likes of Greece, Ireland and Portugal into the grips of
staunch budget cuts, tax hikes and privatization of state-sponsored
The burden now falls on Spain's Prime Minister Mariano Rajoy and
Finance Minister Luis de Guindos Jurado. Late last week, Rajoy
stated that he would like to know what sorts of stability would be
offered before submitting his country to a bailout. He must now
wait for Draghi to convince other ECB Governors to get on board
with the plan. Investors have speculated that Draghi was unable to
launch a new bond buying program because conservative members
opposed such a plan and he could not create a plan with enough
concessions to conservatives to launch bond purchases.
One large opponent has been the President of the Bundesbank,
Jens Weidmann. The former economic advisor to German Chancellor
Angela Merkel has been one of the largest opponents to ECB action
fixing what has largely been a fiscal crisis. The ECB cannot fund
fiscal deficits as per its charter and Weidmann feels as though
bond purchases would do just that. Therefore, any bailout may end
up coming from the joint bailout funds, first the temporary
European Financial Stability Facility (EFSF) and then the permanent
European Stabilty Mechanism (ESM).
At the most recent European summit, leaders agreed to allow the
EFSF to purchase bonds on the primary market (at auction).
Reservations over placing the burden of bond stability on the
rescue fund arose last week due to the fact that the EFSF only has
about $308 billion of remaining capital to invest. However, these
fears seem to have been quelled over the weekend following reports
of the EFSF searching for banks to give it credit lines, increasing
its capital six-fold to nearly $1.85 trillion. This amount of
capital is significant and could be enough to stabilize Spain and
give some assistance to Italy.
The seeds for a plan to save the euro seem to have been laid,
but the rate of further progress may be determined by the political
will of European leaders to move forward. The burden falls on Rajoy
and de Guindos to act decisively and quickly. Sill, many consider
submitting for a bailout to be political suicide for the two. For a
bailout, Rajoy would most likely have to agree to a series of
politically unpopular budget cuts and tax hikes, which could
further hurt the economy in the short-term, though conceivably
providing long-term benefits. By inflicting further economic pain
on Spain, Rajoy could potentially lose his job, begging the
question: is a lifelong politician ready to go the way of
politicians from Greece, Ireland, and Portugal to save his
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