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Spain plays waiting game on bailout

Thursday, October 11 17:09:36

Spain is comfortable putting off an international aid request for weeks or even months as it waits out German political obstacles and seeks greater definition on the ECB's bond-buying programme, analysts and sources say.

In the meantime, Spanish Prime Minister Mariano Rajoy is focusing on measures such as intensifying labour market reforms, as well as pushing for a European banking union that would help rebuild confidence in Spain's tarnished banking sector.

Spain's borrowing costs spiked in July, the yield on the benchmark 10-year bond jumped over an unsustainable 7 percent, but tumbled after ECB head Mario Draghi unveiled a bond-buying scheme to lower Spanish borrowing costs.

Spain must first sign up for a European rescue plan to trigger the bond buying. Given its debt position, the Spanish government still sees that step as inevitable but pressure has eased as investors are less willing to bet against Spain with the ECB waiting in the wings.

Germany has sent Spain strong signals that it should hold off because German Chancellor Angela Merkel is wary of presenting a fresh aid request to her parliament, euro zone sources say. Sources familiar with Rajoy's thinking say he also wants the ECB to indicate exactly what it will achieve with the bond-buying. Is the idea to avoid periodic volatility or to define a reasonable level for the risk premium on Spanish debt? they ask.

"We will end up there, with ECB action, but the ECB is still designing the instrument in more accurate terms," said a source close to the government. "The markets understand that we have the fire extinguisher. We'll see how it evolves in the coming weeks."

Turmoil over Greece, a fresh spike in Spanish yields or a credit rating downgrade to junk status for Spanish government bonds could accelerate the process, but for now Madrid is comfortable taking it slow, the source said. ( C ) Reuters