Risk premium falls below 400 points for first time since April

Spain’s risk premium fell below 400 basis points at one point during Wednesday’s session for the first time since April, after the German Constitutional Court ruled that the country could contribute to the European Stability Mechanism (ESM) permanent rescue fund.

Rejecting suits seeking a stay in the creation of the ESM, the court ratified Germany’s participation in the fund with minimal conditions. These put a cap on the country’s contribution at 190 billion euros, although the German parliament can vote to increase this. Key decisions taken by the ESM will also require ratification by the Bundestag.

Germany is the last euro-zone country to give the go-ahead to the ESM, which is now expected to be up and running shortly. The ESM had already been approved by the Bundestag. German President Joachim Gauck said he would sign the legislation into law as soon as possible.

In a separate development, Spain’s secretary of state for the economy, Fernando Jiménez Latorre, said that the Regional Liquidity Fund (FLA) being set up to help the country’s cash-strapped regions would be up and running by the start of next month.

Prime Minister Mariano Rajoy said that his government was still weighing up whether to tap the ESM fund or its temporary predecessor, the European Financial Stability Facility (EFSF).

The yield on the benchmark 10-year government bond fell to 5.653 percent, helping the spread with the German equivalent to narrow by 14 basis points to 400 in late trading.

The news also buoyed the stock market. The blue-chip Ibex 35 broke through the 8,000-point mark at one point in the session before some profit-taking set in. The benchmark index eventually closed up 0.78 percent at 7,992.10 after an intraday high of 8,076.60 points.

Speaking in Congress, Rajoy conditioned any petition for help from the ESM or the EFSF to the evolution of the risk premium. “I don’t know whether Spain needs to ask for it,” he said. “Let’s see how the risk premium develops.”

Countries wanting to trigger European Central Bank (ECB) purchases of their sovereign debt in the secondary market must first request that one of the rescue funds buy their bonds in the primary market.

“The fall in interest rates in Spain is predicated on the market’s expectation of an ECB intervention, which entails a request for support, not on any intrinsic development in Spain,” Bloomberg quoted Gilles Moec, co-chief European economist at Deutsche Bank in London, as saying. “Rajoy has limited room for maneuver to play for time and discuss the conditions.”

Rajoy rejected suggestions made by opposition Socialist leader Alfredo Pérez Rubalcaba that he plans to delay any decision on asking for a second bailout on top of that already conceded to recapitalize Spain’s banks until after regional elections in Galicia and the Basque Country, slated for October 21.

“This is a very important decision,” Rajoy told lawmakers. “We will have to study whether it’s necessary, if it is best for Spain; we have to know what the conditions are, and in light of all of this we will take a decision.”

In the event of the Rajoy administration opting to tap one of the rescue funds, Rubalcaba demanded that Congress be allowed to vote on the conditions attached to such assistance.

Meanwhile, Latorre said the process of setting up the FLA was at an “advanced phase” and should be formalized within the next few days.

A number of regions, including Catalonia, Valencia and Murcia, have already officially flagged their intention of tapping the FLA, which will have funding of 18 billion euros. Of the total, 8 billion euros will be advanced by the country’s banks. A further 6 billion euros will come from the state lottery company LAE, and the remaining 4 billion will be injected by the Treasury.