As we reported first thing this morning, Spain, while happy to receive the effect of plunging bond yields, most certainly does not want the cause - requesting the inevitable sovereign bailout. To paraphrase Italy's undersecretary of finance, Gianfranco Polillo: "There won’t be any nation that voluntarily, with a preemptive move, even if rationally justified, would go to an international body and say -- ‘I give up my national sovereignty." He is spot on. However, the one thing that will force countries to request a bailout is the inevitable outcome of soaring budget deficits: i.e., running out of cash (as calculated here previously, an event Spain has to certainly look forward to all else equal). Which simply means that sooner or later Mariano Rajoy will have to throw in the towel and push the red button, knowing full well it most certainly means the end of his administration, and very likely substantial social and political unrest for a country which already has 25% unemployment, all just to preserve the ability to fund its deficits, instead of biting the bullet and slashing public spending (and funding needs), which too would cause social unrest - hence no way out. But why would a bailout request result in unrest? Reuters finally brings us the details of what the Spanish bailout would entail, and they are not pretty: "Spain is considering freezing pensions and speeding up a planned rise in the retirement age as it races to cut spending and meet conditions of an expected international sovereign aid package, sources with knowledge of the matter said...The accelerated raising of the retirement age to 67 from 65, currently scheduled to take place over 15 years, is a done deal, the sources said. The elimination of an inflation-linked annual pension hike is still being considered."
More from Reuters:
The new pensions steps, which could be announced as soon as next week along with the 2013 budget, would send a strong signal to investors that Spain is serious about implementing structural reforms it has delayed because of the political cost.
Prime Minister Mariano Rajoy, who was forced earlier this year to break campaign pledges such as not raising taxes, has repeatedly said he would not touch pensions, but he has few options left to trim the budget after drastic cost cuts.
He toned down his language last week and said it would be "the last thing" he would do. On Tuesday, Deputy Prime Minister Soraya Saenz de Santamaria said the government was not implementing any cut on the pensions "for the time being".
Sources with knowledge of the government's thinking said Rajoy's comments were a sign that his stance was shifting.
"He just said that he would not cut the pensions. But did you hear anything else? We both know that there are several ways of cutting. One is to simply leave them steady against inflation," said one of the sources.
A second source said the acceleration in the change in the retirement age was backed by the government while a third source, who discussed the issue with senior Spanish officials, said a freeze was expected.
"Not increasing them is also an adjustment," the third source said.
"There is no way around it. You have to cut the link with inflation and freeze the pensions next year," said Jose Carlos Diez, chief economist at Intermoney brokerage in Madrid.
"And to me, that would be just a start... The pensions, the unemployment benefits and the borrowing costs are eating up all the efforts on the spending side so you need to act in those areas," he added.
Both removing the inflation adjustment and accelerating the retirement age increase are long-standing European Union demands and any bond-buying programme to help Spain finance its debt would insist on this, senior euro zone sources said.
Countries which were previously rescued, such as Greece, Ireland and Portugal all had to pass steep cuts on pensions.
In Greece, the cuts ranged from 20 percent to 40 percent, while new pensioners had a 10 percent pay cut in Ireland and Portugal scrapped the Christmas and summer extra payments.
Key word: "that's just the start" - meaning it's all downhill from here, as true austerity, long delayed, is finally implemented (on Germany's dime of course).
First cue Spanish official denials it will do no such thing (a la Rajoy saying Spanish banks will not get a bailout two weeks before they, well, were bailed out). Then cue riots.