Spain's Rajoy to seek German backing for a bailout

MADRID Tue Sep 4, 2012 10:31am EDT

Spain's Prime Minister Mariano Rajoy gestures during a joint news conference with France's President Francois Hollande (not pictured) after their meeting at the Moncloa Palace in Madrid August 30, 2012. REUTERS/Juan Medina

Spain's Prime Minister Mariano Rajoy gestures during a joint news conference with France's President Francois Hollande (not pictured) after their meeting at the Moncloa Palace in Madrid August 30, 2012.

Credit: Reuters/Juan Medina

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MADRID (Reuters) - Prime Minister Mariano Rajoy's eight months in power have been tumultuous from the start but September and October may be even tougher, with the Spanish leader assailed on all sides.

Internationally he is caught between diverging pressures from Germany and France, and at home he faces protests over spending cuts sought by the euro zone's big powers.

France wants Rajoy to request an international bailout to prop up Spanish finances and stop the debt crisis deepening.

But he is unwilling to ask for aid until he is sure of support from euro zone paymaster Germany which he will seek on Thursday at a meeting with Chancellor Angela Merkel.

"The worst thing that could happen is Spain asks for aid and Germany blocks it," said a senior European diplomat.

Last week Rajoy met French President Francois Hollande who nudged him to ask for help before October to give European leaders time to consider it before an October 19-19 summit.

But Rajoy told Hollande he was getting mixed messages from Germany, according to a source who was briefed on the meeting.

Berlin wants more details of the problems in Spanish banks, including the results of an audit by global accounting firms due later this month, and regions, which will get 45 billion euros from Spain's central government this year, before backing a bailout.

Spain has already been promised up to 100 billion euros of European money to keep its banks afloat. A sovereign bailout could deplete the region's rescue funds, the EFSF and the new ESM that will be the euro zone's permanent rescue fund.

Rajoy's team feels that Merkel is also wary of news that could jeopardize a September 12 German Constitutional Court ruling on the ESM as she faces some domestic resistance to Germany providing money to prop up countries that run into trouble.

"Germany doesn't want any messages right now that will contaminate the decision of the constitutional tribunal. We can't precipitate things," said a Spanish government source.

As Merkel and Rajoy meet, European Central Bank head Mario Draghi is due to give details of his plan to shore up Spanish and Italian bond prices with a secondary market buying program. But he has said this will not happen until Spain agrees to conditions in return for EFSF help.

With borrowing costs painfully high, a recession undermining his austerity drive and Spaniards angry over cost cuts, that deal could be attractive to Rajoy even if it means protracted wrangling over the terms.

RATING UNDER SCRUTINY

The pressure on Rajoy is just as unrelenting at home, where he faces increased social unrest over tax hikes and cuts at public schools and hospitals. He must present the 2013 budget before the end of September and this is likely to reveal a gloomy economic outlook as well as more spending cuts.

Moody's credit rating agency is due to review Spain by the end of the month and could downgrade the debt of the world's twelfth largest economy to junk status.

That could block Spain from markets before a financial hump in October, when some 27.5 billion euros of debt comes due.

Rajoy's approval rating has crumbled in his first six months of office, with 56 percent of Spaniards having a bad or very bad opinion of him in a July poll by Sigma Dos.

In every speech Rajoy says: "You can't spend what you don't have", to explain why Spain is suffering for spending borrowed money during a property boom that ended in 2007. But he lacks inspiration to keep the public on his side.

A close ally will run for re-election as regional president of Rajoy's home region of Galicia on October 21 and this will be seen as a referendum on the government's austerity policies.

But analysts say Rajoy's approach of delaying tough decisions and his capacity for riding out turbulence may save him from the fate of the leaders of Ireland, Greece and Portugal, whose political careers ended with their countries' bailouts.

"Everyone sees the rescue as inevitable. That's good for the government, they've dealt it out in steps so it looks like a logical stage," said Jose Ignacio Torreblanca, from the European Council on Foreign Relations think tank.

"Also, the back and forth with the ECB looks good for Rajoy, it looks like the other side is giving a bit as well."

NO EXCEPTIONS

Spain and the euro zone are already in talks over the terms of sovereign aid. [ID:nL6E8JNKXK] But Rajoy told European newspapers this week that Spain is doing so many reforms that it should not have to do any more in exchange for new money.

Rajoy wants any fresh terms tacked onto the existing Spanish-EU agreement for the bank rescue and does not want a new memorandum of understanding, said the source who was briefed on the meeting with Hollande last week.

But his European partners are taking a tough line.

"There will be no exception made for Spain," Michael Meister, vice-chairman of Merkel's conservatives in the Bundestag lower house, told Reuters. "If such a request is made... there will need to be an agreement on the conditionality of the assistance, as in all previous cases."

With German Central Bank President Jens Weidmann opposed Draghi's plan to buy Spanish and Italian bonds, the ECB boss is under pressure to attach strong conditions.

Finnish Prime Minister Jyrki Katainen, one of the most hardline euro zone voices on conditions for bail-outs, is next in line to visit Rajoy, on September 11.

(Additional reporting by Catherine Bremer in Paris and Andreas Rinke in Berlin; editing by Barry Moody and Anna Willard)

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Comments (2)
dareconomics wrote:
Let’s start by dismissing a common Eurocrisis fallacy that the article repeats:

Internationally he is caught between diverging pressures from Germany and France…

Germany and France are not diverging; they are converging. Hollande wanted to be the President of France and had to pander to his Socialist electorate to win the election. Politicians says lots of things during elections that they have no intention of supporting when they need to govern.

Hollande and Merkel are both members of the cult of the euro. They believe that the euro is more than just a currency, but a way to drive a closer political integration of the continent akin to a United States of Europe. When Hollande suggests that Spain seek a bailout, you can take it to the bank, just not an insolvent European one, that Merkel supports this action, too.

A Spanish bailout is going to compromise the resources of Europe and the alphabet soup of funds and institutions that will be funding it. Hollande and Merkel will have to drum up support in advance of announcing a plan at the next Euro Summit in October, so they need Rajoy to request a bailout as soon as possible.

The Germans do not want to sign a blank check, so they need more information about the financial health of the Spanish banks and regions.

Always keep in mind the bailout timeline. A lot of graft, corruption and fraud is festering within these institutions; whatever amount is announced at first will be woefully short of paying for the problem.

Germany wishes to avoid a situation where the numbers keep escalating the deeper one travels into the bailout waters due to voter backlash. Look at the Greek situation and how German voters feel about Greece today.

When Germany and France say that Spain should officially request a bailout, what they mean is that Spain will not get any money unless it agrees to Greek-style humiliation at the hands of the troika. Rajoy knows that requesting a formal bailout will spell the end of his government. He believes that they are already doing enough reforming and he wants bailout money without additional strings attached.

This argument may be true. Spain has already made deep, unpopular cuts and is poised to do more. What Rajoy does not understand is that the humiliation is what matters to the Germans. It’s part of their national psyche; if you don’t believe me, check out some German porn next time you’re at the airport.

Germany was totally destroyed at the end of World War II. Both the east and the west were rebuilt by the Russians and Americans respectively, but they had to suffer through some deprivations to obtain that help. The Germans are now repeating the cycle with their allies.

Rajoy has a better hand than one may think after examining the rapidly deteriorating Spanish financial condition. While the Spanish need to request a bailout, their Eurozone partners need them to request a bailout, too:

http://dareconomics.wordpress.com/2012/09/03/draghi-rajoy-in-game-of-chicken/

Sep 04, 2012 12:59pm EDT  --  Report as abuse
KarlMarx wrote:
He doesn’t want to give up sovereignty but he will have to to get the bailout…which in the end will not work but may buy a few months. The austerity is coming one way or another.

Sep 04, 2012 2:01pm EDT  --  Report as abuse
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