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Spain May Pay Price for Delaying Aid Request

It has become Spain's version of Godot: waiting for Rajoy.

Bloomberg

For various reasons the country's prime minister, Mariano Rajoy, has deferred seeking help from a financial assistance program that Europe has tailored to Spain's needs. But many economists, analysts and business executives here are increasingly worried about the costs of further delay.

They warn that waiting to seek aid, and the uncertainty the delay engenders, threatens to push the economy deeper into recession. And that, they say, could increase the ultimate cost, to Spain and Europe, if the aid eventually needs to be granted under crisis conditions.

As long as Spain's borrowing costs remain below 6 percent, as it has been since the European Central Bank said it would buy the country's bonds if Spain made the request, the Rajoy government might seem to have no reason to rush. But the downgrade of Spanish debt to near junk status by Standard & Poor's last week has underscored the fragility of the country's finances. And the seeming political paralysis in Madrid may be reinforcing a wider economic stasis.

"The economy has stopped," said Ángel Berges, the chief executive officer of AFI, an economic consulting firm based in Madrid.

The indicators are grim indeed: Cement production has reached its lowest level since the 1960s. Car sales are down 37 percent from last year. And on weekdays the public squares of Madrid are filled with the unemployed — young and old — whiling away the hours.

Even the wealthy are feeling the strain. In the boat slips of Barcelona, "For Sale" signs hang on nearly every moored yacht.

The bond-buying program that the E.C.B. announced in early September is meant to help keep a lid on the borrowing costs of besieged countries like Spain, if they ask for the help. Under the plan, the big new European bailout fund, whose financial firepower is to eventually reach €500 billion, or $648 billion, would buy newly issued Spanish bonds directly in the government's auctions, while the E.C.B. would stand ready to buy existing bonds in the secondary market.

Experts note, though, that there is more at stake than the yield on Spain's government bonds. They point out that those lower interest rates would lead to reduced borrowing rates across the board, providing a cheaper source of financing for Spanish banks and corporations that could stimulate investment in the economy.

And yet, Mr. Rajoy's reluctance to sound the SOS has its own logic. To begin with, German officials have urged him to wait, as they have no desire to present yet another euro zone rescue package to their fed-up voters.

But Mr. Rajoy, a stolid, cautious man, has plenty of domestic reasons, too. Since coming to power in late 2011, he has seen his popularity plummet after presiding over a series of wrenching austerity programs. Now, before the regional elections in his home state of Galicia this Sunday, which could test the strength of his center-right Popular Party, Mr. Rajoy has every incentive to wait a bit longer to request help from Europe, which would bring with it even further outside oversight of the Spanish budget.

"There is no pressure on us — we will take the decision when we know everything we need to know," said a senior government spokeswoman in Madrid, who declined to be identified by name as a matter of policy.

But analysts argue that by waiting several more months, as many here predict will happen, Mr. Rajoy is playing a dangerous game. Not only will the economy continue to suffer from uncertainty; Mr. Rajoy also runs the risk of being forced to seek help under the duress of a market panic, if bond investors once again begin to bet against Spain. Europe's intervention under that circumstance could lead it to demand even harsher policy measures — like the socially disruptive cuts in Spanish pensions that so far Mr. Rajoy has avoided making.

"If you wait too long, you will be forced into a program that will have much tougher conditions — so better to ask for it now," said José Manuel Campa, who was secretary of state for the economy during the previous government and is now a professor at the IESE Business School at the University of Navarra in Madrid.

In terms of national debt, Spain is nowhere as bad off as nearly bankrupt Greece, whose debt burden is nearly 200 percent of the size of its economy. In Spain's case, the number is currently 90 percent — the same as with France.

The main worry is not the size of the debt, though, but how quickly it has been amassed. By next year, when it is expected to rise to 96 percent, Spain's debt burden will have grown by nearly one-third since 2011, according to the International Monetary Fund. That rate of debt expansion outpaces every other country in the world and is the result of a plummeting economy, high interest rates and the burden of rescuing Spain's collapsing banks.

One of the concerns Standard & Poor's raised in its downgrade last week is that the austerity measures already adopted by Spain are choking off any chance for economic growth.

Take the car industry. Hard hit by the recession, it now sells approximately the same amount of cars — projected to be about 700,000 this year — that it did in the 1990s. At the industry's peak volume, in 2006, Spaniards purchased 1.6 million vehicles. Further curbing demand is the recent increase in Spain's value-added tax, essentially a sales tax. It is now 21 percent, up from 18 percent, and it helped send Spanish car sales plunging by 38 percent in September, the first month of the higher tax.

"We are worried about the market because sales are so dependent on the economy," Juan Antonio Sánchez Torres, the president of Ganvam, the Spanish car retailers' association. "The recent VAT tax increase raised the cost of a car by €650 on average. That has an important psychological impact that can stop consumption."

Downward pressure on wages in both the public and private sector has partially benefited the economy by making Spanish exports — like machinery parts and chemicals — more competitive.

But the Spanish economy is largely driven by domestic demand, and there are few signs that the traditional propellants — personal, corporate or government spending — will pick up any time soon.

Meanwhile, bank loans have virtually dried up. Compared with 2006 and 2007, when bank lending grew at about 25 percent each year, the evaporation of credit has had a devastating effect on consumers and corporations alike.

Analysts at AFI, the Spanish financial consultancy, do not expect the country's banks — many of them still trying to dig themselves out from a mountain of bad real estate loans — to resume lending in any measurable way until 2014 at the earliest. All the more reason, analysts say, that Spain should quickly seek the credit-easing help of the E.C.B. program.

Adding to the potential costs of a Rajoy delay is another looming problem. Despite the austerity measures so far, it seems nearly certain that the government will miss the deficit-cutting targets for this year and next that it has already agreed to as part of its euro zone obligations. That raises the prospect that Madrid will be forced to submit to even tougher budgetary strictures if it waits until later to qualify for the E.C.B. bond-buying support.

"The government will have to take additional measures to reach the 6.3 percent of G.D.P. target," its goal for 2012, said Federico Steinberg, an economist at the Real Instituto Elcano, a research group focusing on Spain and its place in the world. "They will need to freeze pensions or even reduce them."

Pensions take up about €100 billion of Spain's €350 billion in annual spending, Mr. Steinberg pointed out. And to date they have been the one area that for political reasons has been spared the budgeter's knife. Just the opposite, in fact: As part of the government's recent package they were increased by 1 percent.

Because many pensioners are now the sole breadwinners among work-bereft families, any cutbacks in retirement payments would carry a devastating social cost. Better, Mr. Rajoy's critics contend, that he not risk such an outcome by waiting.

A sardonic joke is currently making the rounds in Madrid at Mr. Rajoy's expense: If you meet a Galician on the stairs and start a conversation, the encounter will be so ambiguous that you won't know if he is going up or down.

Mr. Rajoy's ambivalence about seeking Europe's help might be partly explained by his Galician roots, say those who relate the joke. But as they wonder whether Spain is heading back up, or farther down, few laugh when they tell it.

Borja Bauza contributed reporting.

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