Thursday was a big day for the euro. European Central Bank(ECB) president Mario Draghi unveiled a plan that could see the central bank buying up unlimited amounts of bonds in a move he believes makes the euro irreversible and will draw a line under the euro zone debt crisis. Markets reacted positively to the news, but as always with the euro zone debt crisis, there is a snag.
"Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios," said Draghi in his monthly press conference at the ECB’s headquarters in Frankfurt.
The conditions in question are going to prove difficult because in order to be included in the ECB program, any country will have needed to ask to EU and International Monetary Fund (IMF) for assistance. In order to get that assistance, a country will have to accept conditions on its fiscal policy, something Spain has until now been very reluctant to do.
In fact the issue is so sensitive that Spanish Prime Minister Mariano Rajoy claimed it was not even raised at a meeting with German Chancellor Angela Merkel in Madrid. "When there is news I will tell you,” was Rajoy’s rather irritable response to reporters following the meeting.
Rajoy probably knows he is going to have to play ball and accept conditions on fiscal policy. But he will do everything possible to avoid such a situation, or at least get a deal that allows him to tell voters he got the best deal possible, which will not be easy given Draghi is demanding conditions be "strict and effective."
“I think it’s inevitable that Spain will ask for a bailout. Until now, it has been playing a game of chicken with the ECB,” said Nouriel Roubini, the founder of RGE Monitor in an interview with CNBCfrom the Ambrosetti forum in Italy.
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“This could fail in the case of Spain where the recessionand the housing crisis are getting deeper…maybe Spain does not deserve this program,” said Roubini, who thinks the ECB’s terms are “quite generous.”
As data showed Spanish industrial output falling for the 11th month in July, Roubini warnedRajoy would struggle to meet can meet any conditions imposed by the EU and IMF.
“They might fail because their recession is getting deeper, so the fiscal targets may not be achieved. The banking problems are severe, their housing crisis is severe, unemploymentis severe,” said Roubini who wonders whether the ECB will withdraw support for Spain in order to push them into a full troika program.
Others agree that Rajoy has little option but to accept official assistance, with conditions.
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“We suspect, however, that while Mr. Rajoy might well be prepared to play a degree political hard-ball in order to extract as easy terms as possible from the EFSF/IMF, terms will be agreed in a reasonably timely manner,” said Bank of New York Mellon’s Simon Derrick in a research report on Friday.
Goldman Sachs believes that it will be settled by the end of September. “Spain will make a formal request for EFSF support at the Eurogroup meeting.” said Dirk Schumacher, an economist at Goldman Sachs said in a research note following the ECB meeting.
“With a large redemption looming at the end of October, we expect Spain to move towards seeking support.”
- By CNBC EMEA's Head of News, Patrick Allen