Analysis: Rajoy's bailout shyness adds to Spain's risks

Wed Oct 31, 2012 10:56am EDT
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By Julien Toyer

MADRID (Reuters) - The longer Prime Minister Mariano Rajoy puts off asking for aid from the euro zone, the greater the risk of further financial turmoil and an even worse recession in Spain, analysts say.

Promises of help from the EU and the European Central Bank have brought Spain's borrowing costs down from unsustainable levels in the past few months. But ironically, if Rajoy is persuaded by the improved market conditions that he no longer needs to ask for help, it could make the situation worse.

A government source told Reuters on Wednesday that the prime minister had not ruled out applying for a rescue, but deficit cutting progress at home and EU movement toward a banking union both give the government breathing room.

"That doesn't mean we won't ask for it, but we don't see it necessary (right at the moment)," the source said. Earlier this month another source familiar with Rajoy's thinking told Reuters that Spain will seek aid, but will not rush into it.

Under the proposed programme, countries such as Spain could seek aid from the European rescue fund, the European Stability Mechanism, which would trigger bond buying by the central bank to stabilize borrowing costs.

The central government is already 95 percent funded for 2012 and will begin pre-funding 2013 in bond sales this year, which seems to give Rajoy breathing room to delay a decision.

But analysts say putting off a request for a precautionary credit line is wasting precious time to fix the euro zone's fourth biggest economy, already shrinking for five quarters.

Uncertainty has frozen business investment, and job destruction is expected to continue next year, worsening an unemployment rate already at 25 percent.   Continued...

Spain's Prime Minister Mariano Rajoy (R) listens to Deputy Prime Minister Soraya Saenz de Santamaria at the Spanish parliament before his speech on the results of the last European Council in Madrid October 31, 2012. REUTERS/Andrea Comas