Brussels, 23/07/2012 (Agence Europe) - The Spanish government consistently rules out any idea of a full-scale bailout for Spain, despite the record high interest rates being charged to roll over Spanish debt and the worsening economic forecasts for the country. Spain is perfectly solvent and this will help it get over the current difficulties, said Spanish Economy Minister Luis De Guindos on Monday 23 July at the Spanish partliament. His commented before heading off to Berlin for talks with Germany's Finance Minister Wolfgang Schäuble that Spain hadconsiderable growth capacity and did not have the problems faced by the countries that have been bailed out, which is why Spain would not need to be bailed out.
On Tuesday, Spain and the European Commission will sign a Memorandum of Understanding (MoU) about European aid of up to €100 bn to recapitalise Spanish banks suffering from the collapse of the property bubble. In return, Spain will be be required to introduce bank restructuring and increased bank supervision (see EUROPE 10660). A special emergency reserve fund of €30 billion is being set up to cover cash-flow needs of Spanish banks that may emerge ahead of the unveiling of the bank stress test results, tests that are expected to be concluded in September.
The agreement on Friday of an MoU for Spain has not reassured the money markets, which are concerned that Spain will not be able to continue rolling over its debt unaided. The yield on Spanish ten-year bonds hit 7.5% on Monday, a record high, before falling to a more affordable level, although the Spanish government has always said that 7% was the upper limit in terms of long-term affordability. De Guindos said the markets were over-reacting in an often irrational manner and it was time to consider how to prevent artificially high interest rates caused by speculation. On Tuesday, the Spanish treasury will be testing the market with new bonds.
It will be very difficult to honour public debt commitments without economic growth. Alongside the anger they are generating among Spaniards, the austerity measures introduced by Rajoy's government are deepening the economic recession and lengthening the dole queues. Unemployment current stands at 25% of the working populatoin. The Bank of Spain recently announced that the economic recession would be worse than forecast, with GDP shrinking by 0.4% in the second quarter of 2012. Growth is not expected until 2014, rather than 2013, especially given the announcement of a new austerity programme of €65 billion (see EUROPE 10657).
The Spanish government knows that it will be difficult to reverse this trend unaided because as a member of the single currency, the battle to prevent undesirable hikes in interest rates demanded for public bonds is not in the government's hands but rather that of “other types of institutions”, explained De Guindos. A heavy hint to the ECB to get it to reactivate its bond purchase system on the money markets. EU Competition Commissioner Spaniard Joaquín Almunia says the Spanish austerity programme gives Madrid the right to ask its European partners to do their part to preserve financial stability in the eurozone, explains Spanish newspaper El País after a meeting on Monday between Almunia and Brussels-based Spanish media. A European Commission spokesperson points out that according to statements made at the recent eurozone summit, the eurozone bailout funds are operational to buy up the bonds of eurozone nations that are introducing reforms and making huge spending cuts but are still coming under pressure from the money markets. (MB/transl.fl)