Europe's chicken or egg problem is about to strike with a vengeance. As a reminder, the biggest paradox of the recently conceived "make it up as you go along" bailout of Europe is that "in order to be saved, Spain (and Italy) must first be destroyed". Sure enough, the markets have long since priced in the "saved" part with the Spanish 10 year sliding to multi-month lows, but in the process everyone forgot about the destruction. Because as has been made quite clear, secondary market bond buying will not be activated without a formal bailout request by a country, in essence admitting its insolvency, and handing over domestic fiscal and sovereign control to the IMF and other international entities. As a further reminder, many, Goldman Sachs especially, had hoped that Spain would request a bailout as soon as Friday. To wit: "With a large (and uncovered) redemption looming at the end of October (and under pressure from other Euro area governments), we expect Spain to move towards seeking support." Alas, as we expected, this is now not going to happen, and the pricing in of the entire "saved" part will have to be unwound as Spain is forced to accept being "destroyed" first. To wit: "I don't know if Spain needs to ask for it," Rajoy told parliament in a debate session, referring to an international rescue for Spain."
And ironically the further the market prices in salvation, the more unrealistic a bailout request becomes. In the meantime Spain is running out of cash, and what has been a buying euphoria may well becoming a selling revulsion as the market realizes that without the ECB's explicit bond buying support, there is no reason to buy the bonds of a country with 25% unemployment, a massive budget deficit, an imploding housing market, and insolvent banking system. But who cares about details in a centrally-planned world.
Spain continues to study the price it will have to pay for seeking help from the European Central Bank's bond-buying programme but improved market conditions may make aid unecessary, Prime Minister Mariano Rajoy said on Wednesday.
"I don't know if Spain needs to ask for it," Rajoy told parliament in a debate session, referring to an international rescue for Spain.
Yields on Spanish bonds have fallen dramatically, to five-month lows, since the ECB agreed last week to launch a new bond-buying programme to reduce struggling euro zone countries' borrowing costs provided they first request assistance from the euro zone's rescue fund and abide by strict conditions.
Earlier, in an interview with Finnish newspapers, Rajoy said he had no objection to the International Monetary Fund monitoring Spanish compliance with the conditions for any assistance although he has also insisted that no fresh demands should be made on Spain in terms of cutting debt.
"The IMF is already monitoring our economy," Helsingin Sanomat quoted Rajoy as saying during a visit to Madrid by Finnish Prime Minister Jyrki Katainen on Tuesday.
Spain, which has already secured European rescue funds of up to 100 billion euros ($128.5 billion) for its troubled banks, is also struggling with its fiscal deficit, indebted regions and pressure from credit rating agencies.
"In addition to growth, the only option I am considering is using the central bank's announced mechanism," Rajoy said, according to Helsingin Sanomat.
"It is completely ruled out that we would ask for a bailout for the whole country," he told business daily Kauppalehti.
His comments indicated Spain may apply for a precautionary assistance programme under which the euro zone's rescue funds could buy Spanish bonds as they are auctioned without the country being taken off the credit markets, rather than the kind of full sovereign bailout granted to Greece, Portugal and Ireland.
The conditions on a precautionary programme would be lighter, and the cost to the rescue funds of supporting the euro zone's number four economy would be lower.
Of course, Rajoy's intransigence has only one outcome - the same outcome that Sylvio Berlusconi was met with when he refused to comply with the ECB's demands in November of 2011. In other words, Spain may be the latest country to have its own technocrat leader in a few short months/weeks, but not before the entire surge in Spanish bonds is first unwound.