Next, the Bank of Spain warned that Q3 GDP fell at a significant rate. Finally, we have three European finance ministers from Finland, Netherlands and Germany state that troubled banks (read Spain here) need to follow capital raises in this progression: private, then sovereign, then ESM. This translates into additional pressure on sovereigns as they have to put the new capital injections on their books and increase their debt.
With this backdrop, Spain’s current PM Rajoy stated in the WSJ that Spain will likely ask for a bailout if their funding costs remain high.
Here’s the key section:
Asked whether his government would apply for a bailout, Mr. Rajoy said, "At the moment, I cannot tell you." He said the government would need to determine whether conditions attached to the bailout are "reasonable."
He added, however, that if interest rates on Spain's debt were "too high for too long," thus harming the economy and raising the government's debt burden, "I can assure you 100% that I would ask for this bailout." ( Read More: Spain Bailout Would Boost Euro, but Not for Long: Pros)
Unwittingly, Mr. Rajoy is telling the markets to drive the value of his bonds down as far as they can because he will not ask for a bailout until that happens. Unsurprisingly, Spain’s borrowing costs have risen sharply due to the dawdling of the Spanish government of this critical issue. The Spanish 2yr bond yield has risen from a low of 2.60% on September 7th to a high today of 3.25% and the 10yr yield rose from 5.55% to 5.92%.