So how did the principals react to the European Central Bank’s conditional bond purchase scheme? Well, the German press went nuts but that’s to be expected. More interesting was the reaction of Spanish Prime Minister Mariano Rajoy. As you may now if you’ve been following my stories on this subject, the idea behind the ECB scheme is that they will only purchase sovereign debt in “unlimited” quantities if the countries involved agree to formally ask the European Union for aid through the new bailout fund, the European Stability Mechanism. That means Spain would have to trigger the purchases. As I’ve explained, this would surely mean a series of brutal austerity measures on Spain to get them back in line with agreed-upon fiscal targets.
So how did Rajoy and his Administration react?
Spain will not be forced into requesting a rescue until the attached conditions become crystal clear, senior officials in Madrid insisted on Thursday, setting the stage for a prolonged stand off between the government of Mariano Rajoy and European authorities.
After Mario Draghi, European Central Bank governor, made clear that any assistance from the central bank to reduce Spanish borrowing costs would come with “strict and effective” conditionality, the Rajoy government remained steadfast in its view that a request would only be made if, and when, it is ready.
“There is no urgency,” a Spanish official said following a joint press conference between Mr Rajoy and Angela Merkel, where the German Chancellor deftly avoided a series of questions over possible new conditions for Spain.
Basically, Rajoy is saying “do your worst.” And he has some leverage. The Eurozone might be able to survive without Greece, but Spain is too big to fail. Draghi is adamant that he will not rescue the bond yields of any state that does not comply, but that has not been confirmed by events. So we have a game of chicken. And Rajoy, who campaigned on avoiding the fate of Ireland and Greece and Portugal, has political reasons to remain steadfast. He wants to keep the troika out of Spain; it’s political suicide if they come in and tell him how to manage the Spanish economy.
The knowledge among bondholders that Rajoy could at any time sign up for aid may be enough to keep them at bay relative to Spanish debt, and the debt of other sovereigns. That’s my hope, anyway. Because forcing Spain into more brutal austerity will turn out just the way it has turned out in Britain and any other country with a fragile economy.