The Rajoy Dilemma: borrowing costs on the edge of a knife or a sovereign MoU (CNBC)
The containment barrier effect of the Outright Monetary Transactions program of the ECB, presented a week ago, has significantly reduced the level of the borrowing costs for Spain and Italy. But if countries do not formally requested support, the OMT program will not be activated. Rajoy's dilemma is whether this effect can persist, thereby avoiding having to subject the country to a comprehensive agreement, an MoU, as Portugal or Greece.
Until now, Rajoy has been delaying by saying he will study the conditions. But the world's eyes are focused on him. The question is whether this containment barrier effect will last much longer, politically facilitating Rajoy's life. But in the market, few believe that this effect will allow Spain to avoid applying for a bailout.
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"I don't know if Spain needs to ask for it," Rajoy told parliament on Wednesday, referring to external aid. But according to Nicholas Spiro, managing director of Spiro Sovereign Strategy, even though the ECB bond plan is "working wonders", it won't prevent Spain from eventually seeking a bailout. "(...) the mastery of this plan is that it could work without spending a single cent, which is preposterous," he said on Thursday. (...) "A swift and smooth move by Spain to request external support is needed to validate the recent improvement in market sentiment towards Spain," Goldman Sachs analysts wrote on Wednesday in a note titled: Tensions With Spain Set To Increase, Sooner or Later. Goldman analysts said Spain may be delaying asking for help because of domestic political constraints or because it wants to wait till the publication of bank stress tests at the end of September. But Goldman warns that Spain's delay in asking for help could actually backfire, (...) which would worsen the crisis. "The more the Spanish administration indulges domestic political interests and is perceived to be taking undue advantage of external support, the more explicit conditionality is likely to be demanded," the report said. (...) |
| source: Spain Calls Europe's Bluff as Crisis Eases | CNBC |
