Italy, Spain back under market scrutiny


Spanish Prime Minister Mariano Rajoy kept financial markets guessing yesterday (29 October) over whether he will seek a credit line from the eurozone's rescue fund but said he would do so "when I think it is in the interests of Spain". Meanwhile, Italian Prime Minister Mario Monti is handling yet another crisis over his government's support from political factions.


At a joint news conference after talks in Madrid, Monti said it was vital that the European Central Bank's bond-buying programme to support troubled states be activated, a strong hint that Spain should take the plunge, since he also said Italy did not need a bailout.

"It is of paramount importance that the instrument is put to work, that it does not remain theoretical," Monti said.

Monti said earlier this month that if Spain were to request a credit line from the eurozone's rescue fund, triggering ECB intervention, it would calm financial markets.

While Rajoy maintained his ambiguity, he omitted previous demands to know more details of the ECB's bond-buying plan before making up his mind.

"The instrument is there and any country can ask for it if it finds it necessary. And I will do just that," he said. "When I believe that it is in the interests of Spain to ask for it, I will ask for it. Until I reach this conclusion, I won't do it."

Former Italian Prime Minister Silvio Berlusconi's weekend threat to withdraw support from Monti's government, and regional elections in Sicily in which a protest party led by a stand-up comic polled strongly, highlighted political risk in Italy.

Monti dismissed fears that his unelected reformist administration of technocrats could fall, saying: "I think that the best thing for us to do is continue to work with a time horizon of spring 2013 as has always been our intention."

Rome's borrowing costs have fallen since July, partly due to the European Central Bank's pledge to buy unlimited quantities of bonds if necessary to help states that request aid and accept strict conditions, but also on hopes that Monti may stay on after next year's general election.

Italian and Spanish bond yields rose on Monday, partly due to uncertainty in the eurozone's recession-stricken third and fourth largest economies. But Italy paid less than a month ago to sell €8 billion of six-month bill.

The euro also slipped on doubts over whether Greece, the country that triggered Europe's debt crisis, can agree to a deal on new austerity measures and its international lenders can figure out how to make its huge debts sustainable.

A German government spokesman rejected talk of any new write-down of Greek debt involving official creditors, saying German law would not permit such a haircut.

The European Central Bank has also refused to take any losses on its sizeable holdings of Greek government bonds, saying that would be illegal.

Some market players are concerned by signs that Rajoy, having almost completed this year's borrowing, will try to avoid the stigma of requesting a precautionary credit line from the euro zone's ESM rescue fund.

A Spanish government source said Rajoy was taking into account improving market conditions, some more encouraging macroeconomic data and progress in eurozone integration, such as steps towards a single bank supervisor, but he would have no inhibition about seeking aid if the situation deteriorated.

No need of bailout

Monti sought to nudge Rajoy towards applying for a rescue when the two men met in August in the belief that Italy would benefit indirectly from a backstop for Spain, European diplomats told Reuters. The International Monetary Fund is also pressing for Madrid to seek for a credit line soon, diplomats said.

But with market pressure far less acute since the ECB announced its bond-buying policy, the incentive for Rajoy to apply has waned. Germany, the biggest contributor to the ESM, continues to insist that Spain does not need a bailout.

Rajoy rebuffed a German proposal for a European super-commissioner with powers to reject national budgets, saying it could not be taken in isolation but only as part of a grand bargain on closer eurozone union. He said he was not personally in favour.

"We are giving a message that we really want greater European integration. We can't say something is this first, then something else, without saying where we're going," he said. "As part of a variety of measures for fiscal union, it could be considered."


The Eurogroup announced on 20 July it would grant a bailout of up to €100 billion to Spain to help the country recapitalise its banks (>> read full statement).

The exact amount that Spain will borrow from the eurozone will only be determined in September, finance ministers said.

The eurozone heads of state and governments had earlier agreed, on 29 June, that EU rescue funds could be used in a "flexible and efficient manner" to lower government borrowing costs.

Under the deal, Italy, Spain and other troubled countries will also be able to tap the bloc's temporary EFSF and permanent ESM rescue funds to support their government bonds on financial markets.

The EU summit statement did not give further detail, saying only that the flexibility will be offered to member states that are in line with EU budget deficit rules.



  • 9 November: Economic and Financial Affairs Council