Spain Must Surrender Now

Spain’s Prime Minister remains tight-lipped on whether he has decided to ask for more financial aid for his country, repeating instead Tuesday that he would wait until the European Central Bank outlines its plans and conditions for buying government bonds before making a move.

“As long as we don’t know what decision the ECB is going to make, we won’t be making one either,” Mariano Rajoy told reporters Tuesday.

Two weeks ago the ECB’s president Mario Draghi said the bank would intervene to help lower a country’s borrowing costs if its government applies for rescue aid from the bailout funds set up by the 17 euro countries. But such a request would come with conditions, such as extra cuts.

Following Draghi’s announcement, Rajoy opened the door to such a deal but said the government needed the ECB to clarify its position. “There’s no news until we know for sure what the ECB is going to do,” he said.
--Bloomberg, 14 Aug. 2012

So, Draghi made it reasonably clear in his pre-holiday press conference that the ECB would consider buying the bonds of those countries that surrender their fiscal sovereignty to the Troika (EU, ECB, IMF) in a sincere and penitent manner. Prime Minister Rajoy has been saying for months that Spain is not a third-world basket case and will not consent to external supervision. His new position is that he might apply if Draghi will tell him exactly what he has to do. Draghi’s clear position is that Spain must apply to the Troika, not to the ECB. The Troika allows the EU and the ECB to hide behind the IMF’s strict (American) conditionality, which treats sovereign nations like errant schoolboys, also known as neocolonialism.

Rajoy is afraid of the IMF not only because of conditionality, but also because he doesn’t want outsiders to take a real look at his banks’ loan portfolios, which resemble Texas banks in 1988. The bill will be so big that it might scare the German taxpayer.

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Rajoy’s defiant stand is posturing for the domestic audience, but he has only one card he can play: suicide. The Spanish establishment (including the king) is not going to permit him to push that button. He can scare a lot of investors and drag down the euro, but in the end he must capitulate and agree to submit to foreign supervision. And then he’s got to push the enabling legislation through parliament, which will be painful. He has to do all of this next month.

Spain, which lacks debt market access, needs the ECB’s money for five reasons, all of them immediate:
1. Finance the government’s operating deficit.
2. Repay maturing but unrollable government, bank, regional and corporate bonds.
3. Keep the banks “solvent” in order to keep their ECB lines open.
4. Finance the massive deposit outflow from the banks.
5. Finance the current account deficit.

So, Rajoy will soon have to change his tune from defiance to penitence, and he will have to start selling the benefits of surrender to his people and parliament. Draghi is not going to blink on this one, unless the have-nots on his board launch a coup, which is not yet in the cards.

The next question, which Rajoy is also asking, is whether the ECB will intervene with sufficient force to allow Spain to borrow on its own. The answer to that one is easy: of course not. Everyone and his brother will sell into the ECB’s bid at any price higher than the current market bid. The only way that the ECB can rescue Spain is if it publicly targets a low yield on Spanish bonds and stands ready to enforce it with unlimited firepower, which is not happening, at least not yet.

So Spain, like the eurozone’s other wards, will become another poor relation, given just enough money to live on but not enough to escape horrible penury. Another victory for the European Project. More Spanish waiters in London restaurants.

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