Urgent bailout

The longer Spain delays in applying to the ECB, the longer the recession will last

The cost of financing the public debt, and its natural consequence, the high cost of private financing, now constitute an asphyxiating bottleneck for Spain’s economy. If there is not a prompt reduction in the risk premium (the objective measure of this bottleneck), investors’ distrust will persist and Spain’s emergence from recession will be uncertain and late — perhaps later than 2014. This is a conclusion shared by economic analysts and institutions, both national and international; and, in private, by Mariano Rajoy’s economic team. In spite of this unanimous diagnosis, however, the government remains unwilling to apply the quickest and most effective remedy to reduce this prohibitive financial cost, which is to request the intervention of the European Central Bank (ECB) in the debt market. Such an intervention is far from being a traditional bailout, such as those of Greece, Ireland and Portugal.

The government (and the public) knows that the application for ECB assistance will happen sooner or later. The stability of the risk premium in recent weeks is a mirage, as demonstrated by the upturn in the differential as soon as poorer economic prospects were announced in the euro zone. Because at present financial costs, the unemployment rate may reach unsustainable levels in terms of social stability, and because it conveys a discouraging message to investors when a country seems content to live with a risk premium of around 400 points. If this were Spain’s financial prospect for the time-frame of a year, any reasonable investment project would almost surely look elsewhere.

In short, to keep putting off the bailout amounts to condemning the economy to a prolonged and painful recession. The prime minister has never clearly explained the reasons for which he has so far failed to apply for ECB intervention. It may be deduced that Rajoy is waiting for a green light from Germany to take this step, or that he does not wish to request a bailout whose probable price tag would be a demand on the part of the troika (Brussels, ECB and IMF) for a reform of Spain’s pension system. But if these are indeed the reasons for Rajoy’s reticence, the answer is surely that reactivating the economy and reducing unemployment in Spain cannot depend on the acquiescence of another country. Meanwhile, given the inevitability of the bailout, a thorough overhaul of the present pension system will have to be carried out anyway.

The fear of the loss of votes that a bailout might cause is an exaggerated reaction. Apart from the fact that there are no elections in the offing, the line of credit granted by the EU authorities to recapitalize banks, and Spain’s compliance with the demands defined in the Memorandum of Understanding, already constitute a full-fledged bailout, though confined to the financial sector. With it, Madrid has lost autonomy. It is pointless now to feign reluctance to hand over other powers of decision when Spain has been calling on the ECB to intervene in the debt market to reduce the pressure on Treasury costs. The rules of the game are well known: every EU aid package carries a price tag in terms of adjustments and reforms to be carried out in the economy thus relieved. We have always held that all this in no way implies a loss of sovereignty, but rather a shared exercise of it, in a context of growing European integration. What is not acceptable is to go on putting off economic recovery, and thus contributing to social hardship and the scourge of unemployment.