SPANISH PREMIER Mariano Rajoy is coming under mounting pressure to enter a formal aid programme to meet conditions set by the European Central Bank for any move to buy up his country’s bonds.
Attention quickly turned to Mr Rajoy in the wake of the ECB’s decision to buy unlimited amounts of debt issued by weakened countries if they agree to comply with strict fiscal policy conditions.
While official sources said that the ECB’s new initiative had the potential scale to calm restive debt markets, they said it was now clear that the bank would only take action to put a lid on Spanish borrowing costs if Mr Rajoy sought aid first.
This is shaping up to be the next battleground in the debt crisis, officials said.
A further concern in official and diplomatic circles is the force of the backlash in Germany against the new ECB initiative.
Chancellor Angela Merkel gave tacit support to ECB chief Mario Draghi when the plan was in preparation, and high-level observers in the euro zone are keen to see her win the argument in any German debate.
Mr Rajoy is very reluctant to ask for an aid programme because it would lead to increased fiscal policy oversight by the European authorities, with the possible involvement of the International Monetary Fund.
Releasing details of the new ECB plan on Thursday, Mr Draghi said the IMF’s involvement would be sought for the design of policy programmes for the countries concerned and to monitor such programmes. IMF chief Christine Lagarde later said the fund “stands ready to co-operate within our frameworks”.
Italian technocrat leader Mario Monti has said the ECB plan should diminish the stigma attaching to rescue aid, but Mr Rajoy’s government insists it needs time to examine the ECB plan in detail.
European officials believe Spain will have to seek the ECB’s help if it is to prevent its borrowing costs from spiralling out of control.
“At the end of the day the ball is very much in the court of the Spaniards. There needs to be a request,” said one senior figure.
The aim in any such initiative would be to avert the threat that Spain might need a full-blown bailout programme as it battles a banking crisis, record unemployment and a growing funding crunch in its regional government system.
The authorities believe Spain’s financing requirements may be too big for Europe’s bailout funds if the country was to be taken out of private markets altogether.
A further concern is that any such programme for Spain could led to pressure on Italy to follow suit, a nightmare scenario for the euro zone and its leaders.
Spain secured a special European deal to recapitalise its banking sector during the summer but the agreement did not restore confidence in the country’s debt as investors continued to question the viability of the plan. The arrangement is predicated on Madrid maintaining access to private debt markets for the day-to-day needs of the Spanish state.
With its borrowing costs on the rise, Mr Rajoy’s government has been agitating for the ECB to intervene again in bond markets after a long hiatus. However, the ECB’s insistence on a specific aid programme brings with it the prospect of intrusive policy surveillance which Mr Rajoy is very keen to avoid.
This would be politically damaging for a leader who has struggled to assert control over the financial crisis in Spain since he took office late last year, and who insisted for months that his country had no need for any external aid. A further factor is that he faces difficult regional elections next month.
