Thursday, August 16, 2012

Mariano Rajoy walking a fine line

In order to avoid the wrath of his nation's labor unions, Spain's prime minister agreed to extend the unemployment benefits for another six months.
Bloomberg: - Rajoy said yesterday his government will continue to make payments to the long-term unemployed, extending for six months a benefit adopted by his Socialist predecessor three years ago that was due to expire today.
This may further strain the nation's budget deficit and potentially irritate Germany, who reluctantly agreed to allow the ECB to provide direct support to the Spanish government. And Spain is fully expected to ask for that support.
BNP Paribas: - Both Spain and the European Commission seem to be moving closer to a Spanish bailout. This Tuesday, after a meeting with the King of Spain who had interrupted his holiday, the Spanish prime minister, Mariano Rajoy, reiterated that the Spanish government might be willing to request support as long as the conditions of the ECB’s bond buying are known. And, on the same day, the European commissioner, Oli Rehn, said that Spain has an open mind on the issue of a possible request for a bailout and that if that request comes, the European Commission stands “ready to act”.
Spain's near-term financing needs are not insurmountable (chart below), but the market could shut down rapidly if the ECB does not begin its bond purchase program soon. At this stage the markets will be unforgiving should the bailout fall short of expectations.

Spain's maturing bonds and bills (€mm; source: BNP Paribas)

That's why taking actions that may jeopardize current fiscal conditions is so dangerous, particularly at this stage.
Bloomberg: - “He’s going to provoke an angry response and make the ECB even less willing to provide support,” said Stuart Thomson, a fund manager at Ignis Asset Management in Glasgow, who expects Spain to seek external funds by the end of the year. “Why poison the negotiations with resistance and decisions that will annoy the northern Europeans?”
As the "risk calendar" shows, the next few weeks are going to be critical. Rajoy will meet and greet the Eurozone leadership in order to secure this ECB bailout without agreeing to unsustainable austerity measures.
BNP Paribas: - ... the office of the Spanish prime minister has announced that Mr Rajoy will meet the president of the European Council, Herman van Rompouy, before the end of August, German chancellor, Angela Merkel, on 6 September and the Italian prime minister, Mario Monti, before the end of September. According to press reports, even though the official agenda includes the discussion of the “European situation” in general, Mr Rajoy is likely to use these meetings to press for light conditionality if Spain requests support from the ESF/ESM.
The hope is that the latest action to extend unemployment benefits will not sufficiently irritate Spain's new "creditors" to put a damper in the negotiations.

Note: Portugal and Greece will be watching these negotiations closely to make sure that they didn't get "short-changed" relative to Spain on their own bailout. If the Portuguese politicians feel that Spain got away with a better deal, there may be some push-back on troika to renegotiate the terms.
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