Launch of Europe Bailout Puts Ball Back in Spain's Court
A 500-billion euro ($650 billion) bailout fund, one of the key tools of policymakers trying to find a solution to the euro zone debt crisis, will be launched later on Monday with Spain expected to be the first country to seek help from the fund.
But despite unsustainable borrowings costs and an economy in recession, Spain may not seek help from the European Stability Mechanism (ESM), which has been created to provide financial aid to troubled euro zone countries in return for fiscal reforms.
Resistance at home against austeritymeasures and falling bond yields have led the Spanish government to suggest over the past week that a request for help may not be coming soon.
“Spain is now saying it may not have to ask for help at all. There is a lot of popular resentment against this and (bond) yields have come back down so the pressure is off. Spain could hold off for some time, so we are in a holding pattern in Europe,” David Carbon, managing director, economics and currencies, at DBS in Singapore, told CNBC Asia’s “The Call.” Spanish 10-year government bond yields, the benchmark for borrowing costs in the country, are currently around 5.7 percent. Yields have inched down since July, when they spiked above 7 percent, rattling financial markets and triggering tough talk from the European Central Bank (ECB) to do “whatever it takes” to prevent the euro zone from collapse.
Despiteno immediate compulsion for Spain to seek help from the ESM, analysts told CNBC, yields are bound to come under pressure as investors start to lose patience with Madrid’s procrastination.
“Spain seems to be in no rush to ask for help but the markets are and the longer Spain waits, the more pressure we will see on yields again,” said Mitul Kotecha, head of global currency research at Credit Agricole in Hong Kong.
The ESM will be formally launched at a euro zone finance ministers’ meeting on Monday in Luxembourg with an immediate fire-power of 200-billion euros. According to Kotecha the markets will be looking at the outcome of the meeting for signs whether Spain is seeking a bailout or not.
A Big Step Forward
But whether Spain does or does not seek immediate helpfrom the ESM, its creation, was a big step forward in limiting the risks of the debt crisis, analysts said.
“The broader point is that the firewalls in place in the euro zone have become more robust with the ESM and the OMT (Outright Monetary Transactions),” said Richard Jerram, chief economist at Bank of Singapore, referring to a bond-buying program unveiled last month by the ECB to be used to help troubled euro zone members once they ask for help from the bailout fund.
“The risks of a severe disruption from any fallout from Spain have fallen as a result,” Jerram said.
According to Geoff Lewis, global market strategist, at JP Morgan Asset Management, “The delays are not helpful and Spain is not coming to the table, but the tail risks have been contained and the ECB is there as a backstop.”
—By CNBC’s Dhara Ranasinghe