Market Is Awaiting A Decision On A Spanish Sovereign Bailout

Spanish borrowing costs have plummeted in recent months after ECB President Mario Draghi announced his controversial bond buying program to help ease the euro area’s debt crisis through the unlimited yield-lowering bond purchases, Outright Monetary Transactions (OMT).

Spain’s 10 year bond yields have dropped below 6% partly due to the expectation that the Spanish government will take full advantage of the ECB bond buying program (OMT) that is triggered only after the Spanish government formally requests a sovereign bailout from the ECB and Europe’s permanent rescue fund, the ESM.

Last July, euro-area leaders agreed to develop the framework to create two precautionary credit lines for Europe’s rescue fund, similar to the model that the IMF utilizes when it loans money to countries.

The ESM now offers two primary types of credit lines. The first is Enhanced Conditions Credit Line, or ECCL, which first requires Spain to implement economic and fiscal reforms and places Spain under “surveillance” by a group of outside observers.

The second type of credit line is called Precautionary Conditioned Credit Line (PCCL) which is characterized by having lesser “surveillance” than the ECCL.

According to the ESM guidelines , the PCCL can be accessed in cases “where the economic and financial situation are still fundamentally sound.”

The European Central Bank (ECB) had previously indicated it could buy Spanish bonds if Spain has an ECCL since the credit line comes with built in strict reform conditions that the ECB feels more comfortable disbursing.

There is already strong resentment across Spain on a political level because the country has undertaken a self imposed regimen of austerity reform measures to help contain their sovereign debt.

Many Spainairds have protested the “reform” budget cuts by protesting on the streets. The Spanish unemployment level is currently at 25% and the country is clearly in a recession. Adding more strict reform conditions through an outside ESM bailout package has the potential to cause more protest and political discontent across Spain.

Spain has already secured roughly 80% of its borrowing needs for 2012. But it still needs to find a way to fill in the 20% shortage.

Since Spanish  borrowing costs are still relatively low, there is little incentive right now for the Spanish government to accept an outside soveign bailout package through the ESM but that all could change if Spanish yields begin to rise again.

Requesting a thorny sovereign bailout from Spanish PM Rajoy ahead of last Sunday’s regional elections in Spain could have been political suicide for Rajoy’s party, People’s Party, which is based out of his home state of Galicia.

The two Spanish states that held an election last Sunday were Galicia and the Basque region.

The two regional elections in Spain were viewed by many as a referendum on PM Rajoy’s austerity program and his goverment’s handling of the euro-area financial crisis.

The People’s Party won in Galicia where they retained their absolute majority but in the Basque region nationalist parties won.

The victory in Galicia by the People’s Party gives PM Rajoy some extra confidence to make the formal request for a sovereign bailout.  The economic powerhouse region of Catalonia, where the independence movement has been gaining steam, will hold their elections next month.

Huw Pill, chief economist at Goldman Sachs told Bloomberg T.V. that Spain will most likely request a sovereign bailout “sooner rather than later.” He is expecting the bailout request from PM Rajoy to come sometime in the first half of November.

See him on this Bloomberg video, ” ECB to Deploy Guerilla Tactics.”

About Johnathan Schweitzer 1470 Articles
Welcome to Schweitz Finance. I hope that my financial website will provide you with relevant market information to help you manage your investments with greater clarity and insight.
Contact: Website