A dangerous game of poker

The government of Prime Minister Mariano Rajoy has chosen a political strategy that is extremely dangerous in connection with the European Central Bank’s possible intervention in the secondary debt market in order to lower the risk premium — that is, the cost of securing financing for the Spanish economy.

During last Thursday’s press conference, ECB President Mario Draghi clearly spelled out two basic principles: firstly, that the decision to request the so-called bailout, i.e., the ECB’s intervention in the secondary debt market, is up to Spain; and secondly, that the institution cannot guarantee that a request for intervention would be automatically followed by a lowering of the Spanish risk premium to the level of 200 basis points. “We cannot give such a guarantee beforehand — I don’t think there can be an automatic quid pro quo. The markets respond to reforms.”

This logical clarification has come under virulent attack from certain Spanish government ministers, who accuse the ECB of aggravating the crisis in the country. If the Spanish government’s financial stability policy consists of making the request for an ECB intervention in return for a guaranteed reduction of the risk premium, we are dealing with a gross financial and economic error.

The share of responsibility borne by the EU authorities in the prolongation of the crisis is obvious, and has often been cause for complaints; but this responsibility can only be said to lie in the implementation of mistaken fiscal policies, imposing immoderate budgetary cutbacks and the reduction of the deficit at any price — something that the Spanish government has accepted as an obligation. But the ECB has not decided on the cutbacks in healthcare, education and public investment, whose de-multiplying effects are prolonging the Spanish recession; this is a decision made by Rajoy and his economic team, which has left them with no margin to fulfill their promises.

But the financial error is even more serious. The government ought to know by now that it is not possible to negotiate with the ECB in terms of a closed contract, as in the purchase of an automobile or an insurance policy. Such a lapse is at odds with common sense, and with the autonomy of the European bank regulator. The ECB is under no urgent pressure concerning the request for a bailout or intervention, and thus can hardly be expected to undertake a firm commitment. It is the Spanish government that has to do something about the financial asphyxiation of Spanish companies. It is not out of place to mention here that small- and medium-sized Spanish companies are now financing themselves at costs 50 percent higher than those of similar firms in Europe.

Besides, political haggling of this type contributes to speculation, against both Spanish debt and the ECB, since it amounts to informing speculators as to the differential the bank has to defend, upon which the attacks on debt can then be focused. Rajoy and his economic advisors must make the decision on the bailout (or intervention) on a basis of more serious arguments, and forget this supposed poker game pitting Rajoy against Merkel and Draghi.