Mariano Rajoy, Spain’s prime minister, has called for centralized control of national budgets in the eurozone in an unexpected gesture to mollify Brussels and Berlin on the eve of what is expected to be a crucial week for Madrid.
Spain’s Treasury plans to auction sovereign bonds on Thursday, even though analysts say the country may soon need an international bailout and yields on its debt have risen close to the 7 percent level that heralded previous rescues for Greece, Ireland and Portugal.
Meanwhile Cyprus, a much smaller eurozone economy affected by the crisis in Greece, is facing similar difficulties and may need to be rescued first. Panicos Demetriades, central bank governor, told the Financial Times that Cyprus was increasingly likely to seek European aid because of the need to find €1.8 billion to recapitalize Cyprus Popular Bank, the country’s second largest lender, by the end of this month. The country, Mr Demetriades said, was at “an important crunch time”.
Two months ago, Mr Rajoy defiantly set a unilateral 2012 budget deficit target for Spain of 5.8 percent of gross domestic product, saying the decision was a matter of national sovereignty. But he soon backtracked and yielded to EU pressure to cut the target to 5.3 percent.
At the weekend, he went a step further, calling for the creation of a “European fiscal authority” to direct eurozone fiscal strategy, to harmonize the fiscal policies of the 17 euro countries and to allow “centralized control of finances”.
Spain is eager to secure EU financing to recapitalize some of its struggling banks, but wants to avoid the sort of full-scale intervention that would bring harsh conditions imposed by Brussels and the International Monetary Fund and undermine the authority Mr Rajoy’s governing Popular party.
Speaking at a business conference on Saturday, Mr Rajoy sought to restore confidence in his administration after less than six months in power, assuring his audience that this was “not the eve of the Apocalypse”. Analysts and commentators in Spain and abroad, however, interpreted Mr Rajoy’s change of tune as a sign of desperation.
“How does a politician get from [the assertion of sovereignty] to calling for giving up responsibility for your spending to a central authority unless the situation is so severe that he has no other choices left?” asked Gary Jenkins of Swordfish Research in an analyst’s note. “I think we are not far away from Spain receiving an official bailout.”
Last week, macroeconomic consultancy Capital Economics said: “A worsening domestic economy and limited scope for the state bank reconstruction fund to defuse Spain’s banking crisis make an EU-IMF bail-out package look unavoidable.”
EU and German officials say even a bailout limited to the Spanish banking system would entail conditions and international oversight. “The decision lies with Spain alone,” said one German government insider.
A Spanish government spokesman denied German press reports that Berlin was pushing Madrid to accept a bailout.
Additional reporting by Daniel Dombey in Nicosia and Ralph Atkins in Frankfurt