Spain takes the coward's way

Mariano Rajoy's continual shying away from basic facts on his country's bank rescue indicates deep problems with the package, and will ensure market doubts continue to fester.

Prime Minister Mariano Rajoy’s attempt to convince his country that the Spanish bailout of €100 billion was a victory shows just how much his national pride is getting in the way of running the country.

Within moments of the deal being announced Rajoy received intense criticism from home, with critics taking to Twitter in droves, calling Rajoy a coward and seeking clarification on the terms of the bailout.

The exact terms of the package have yet to be announced, but further austerity measures won’t be required, as the bailout is set to restructure only the nation’s banks. Still, with unemployment at 25 per cent, and a raft of tax hikes and spending cuts already inflicted on the country, it’s unsurprising the Spanish are feeling critical of the deal, despite it being shrouded in mystery.

In the weeks before the deal was announced, Rajoy remained adamant that Spain’s banks did not need a rescue package. This was despite pressure from Germany for Spain to request a bailout for its banks. Eventually, Rajoy succumbed to the pressure from Europe. And it was inevitable it would happen.

There was no question that agreement on a Spanish bailout deal had to be made before the crucial Greek election on June 17. By staging an emergency video conference over the weekend, finance ministers for the 17-member eurozone are trying to show that the issue has been addressed. Faith can be restored, nothing to see here folks.

But the contradictory remarks from Rajoy and EU leaders indicate that the saga will continue for now. After the announcement that a bailout deal had been agreed, Rajoy said the rescue package had been secured with no strings attached.

Since he made these comments, it has emerged that Spain will in fact face supervision from a "troika” of the International Monetary Fund, the European Commission and the European Central Bank. Brussels and Germany have confirmed that the IMF will be fully involved despite not giving any funding toward the rescue package.

Rajoy’s inability to adequately explain the deal to his country shows a lack of competence and understanding as to how big the problem really is. By making statements that indicate that Spain had received a bailout with no strings attached, Rajoy has ensured that market sentiment stays negative ahead of Greek elections. The contradictory statements from Rajoy and other EU leaders will keep investors nervous at least until details are disclosed later in June.

By then, Greek elections will have been held, and the EU may be a very different place.

The news of a bailout gave a brief rally to the markets, but it was short lived as doubts began to emerge about the rescue package. By keeping the details under wraps, these doubts will fester and Spanish bond yields are likely to remain persistently high until more information about the bailout is revealed.

Even the figure announced raises questions. A bailout of a mere €100 billion for the fourth-largest EU economy was unlikely to improve market sentiment much. To put this into perspective, Ireland received €85 billion in its 2010 bailout. And the €100 billion is unlikely to have any effect if problems escalate in Spain. The country is in a deep recession, with a property crash that still hasn’t hit rock bottom. Spain also has the highest unemployment rate of all eurozone countries, with almost 25 per cent of its people out of work. Its economy is set to shrink further in the coming year, inevitably resulting in a further deterioration of investor sentiment in the country.

While we wait to hear the full details of the rescue package granted to Spain, investors will be looking for the next weak link in the chain. Italy is the likely candidate to enter the firing line. As Alan Kohler has pointed out, Italy is facing a myriad of issues stemming from a massive debt trap that has seen its economic growth fall below the national cost of capital (The elefante in the room, June 12).

With Italian bonds yields on the rise, investors are showing caution amid the perception that if Spain is in trouble, Italy won’t be far behind. While Italy’s problems are markedly different to Spain’s, the markets are still a bundle of nerves where the eurozone in concerned. Investors are likely to punish Italy further if it doesn’t act speedily to reassure markets. Italy will need to work swiftly and quickly to avoid the risk of contagion flowing from Spain.