Spain battles to avoid gigantic euro bailout

| September 27, 2012 | 0 Comments

By
This Is Money Reporter and Daily Mail Reporter

04:24 EST, 27 September 2012


|

09:28 EST, 27 September 2012

Spain remains in the eye of the eurozone storm as it suffers violent street protests and expectations mount that it will have to appeal for a massive bailout.

The government is due to unveil swingeing reforms and a 2013 budget today, while the results of bank stress tests and a Moody’s review that could see its credit downgraded to ‘junk’ also loom this week.

Spain’s 10-year interest rate has topped a dangerously high 6 per cent again – prompting one City commentator to accuse it of playing a game of ‘Bond Market Chicken’ by delaying a bailout request until markets force its hand.

Angry protests: Spanish policemen try to prevent demonstrators marching to the parliament building

Angry protests: Spanish policemen try to prevent demonstrators marching to the parliament building

The interest rate indicates the return that the markets demand in order to lend to Spain by purchasing its government debt. A 10-year bond rate above 6 per cent is regarded as unsustainable.

Financial markets have steadied after yesterday’s rout, but the mood remains tense after popular unrest in both Greece and Spain reignited fears that the euro is destined for a messy break-up.

The FTSE 100 was up 1.2 points at 5,769.3 in mid-afternoon trading, while German and French markets were flat and the Dow Jones in New York opened higher.

The euro dipped again today – it is trading at around 79p (€1.26) against the pound and $1.29 against the U.S. dollar.

The European Central Bank recently announced a bond buying plan to prop up weaker eurozone members, and Spain’s prime minister Mariano Rajoy has said that he would request help if borrowing costs do not ease.

As protests against austerity measures turned violent in Madrid, he said: ‘I can assure you 100 per cent that I would ask for this bailout.’

Spain has already secured an £80billion lifeline for its broken banks but pressure is mounting on Rajoy to request a full-blown bailout that could be worth as much as £300billion.

Mike Ingram, market analyst at BGC Partners, said: ‘I speculated last week that Spain, lulled into a false sense of security by quiet bond markets, might be tempted engage in a €800billion game of Bond Market Chicken.

‘We now know the answer to this; Spain has ruled out asking for a full bailout unless the bond markets effectively force them out.

‘There have also been calls by Spanish politicians for the ECB to quantify its potentially unlimited bond market intervention. The wriggling is painful to behold, but pride comes before a fall.’

He added: ‘I would be amazed if Spain could go beyond Friday’s combination of bank audit, 2013 budget and downgrade to junk status without completely losing the initiative.’

Gary Jenkins of Swordfish Research said Rajoy can only hesitate for so long before accepting a bailout because the alternative is probably bankruptcy.

‘At the back end of last week the speculation was that Spain would finally agree to request a bailout on conditions that would be acceptable to them and if that were the case that we could be heading for a small period of calm in the capital markets.

‘However since then we have had various officials making it clear that Spain and Italy do not need bailouts and they would in any event only consider them as a last resort when yields rose to levels that meant they could not access the market.

‘I would have thought that would be the time when their negotiating position regarding terms and conditions would be at its lowest,’ he said.

Simon Denham of Capital Spreads noted that the euro has given back most of
its recent gains as risk aversion sets in again.

‘Only a few months
ago someone said “if Greece was the fuse, Spain is the bomb” and it is
looking increasingly to be the case,’ he said.

Spanish imposition: European markets tumbled on fears Madrid will need a full-blown bailout

Spanish imposition: European markets tumbled on fears Madrid will need a full-blown bailout

‘As
long as the Spanish resist financial assistance investors will continue
to see its unsustainable situation until at some point in the near
future it will cave into the pressure. By not asking for a bailout now
it will just make matters worse.’

Meanwhile, a hard-hitting report says the eurozone faces a ‘lost decade’ of economic woe and sky-high unemployment as it struggles to recover from the sovereign debt crisis.

Ernst Young predicted ‘many years’ of dismal growth and a surge in the number of people out of work to more than 19million across the 17-nation single currency bloc.

In a withering attack on eurozone leaders in the autumn edition of its Eurozone Forecast, EY said the response to the crisis ‘has still fallen short of the game-changer needed to restore long-term stability’.

Marie Diron, senior economic adviser at EY, said the European Central Bank’s recent pledge to prop up troubled countries that ask for help by buying their bonds was a ‘temporary sticking plaster’.

‘Things will continue to get worse before they get better,’ she said. ‘The recent so-called bazooka provided by ECB will serve only as a temporary sticking plaster for the eurozone, albeit an essential one.

‘We believe a more radical approach will be necessary over the coming months to ensure even the weakest of recoveries next year and in the future.’

EY forecast a 0.5 per cent slump in output across the region this year followed by just ‘marginal growth’ of 0.1 per cent next year.

‘Growth will be constrained for many years in the region by lingering concerns over stability and debt,’ the report concluded.

EY said unemployment will rise from the current level of 11.3 per cent or 18million to ‘just over 12 per cent’ or 19.2million by the beginning of 2014.

In Portugal, the jobless total is expected to exceed 16 per cent while in Spain and Greece it will reach 26 per cent and 27 per cent respectively.

Public fury: Spanish protesters shout slogans during a demonstration against government cutbacks

Public fury: Spanish protesters shout slogans during a demonstration against government cutbacks

The comments below have not been moderated.

Not the sticking plaster game again…!!! It’s past that………..try amputation.

Dave

Dave
,

Rossendale, United Kingdom,
27/9/2012 15:58

for a change a country is playing the markets, not markets destroying whole countries.

modified.karl
,

lnd,
27/9/2012 15:29

Spain is swimming against the tide until it changes direction; and even then it still faces the prospect of drowning in a sea of debt if it stays in the Euro.

David James
,

Everdon, United Kingdom,
27/9/2012 14:44

Has anybody thought of Government’s Controlling their own Finances, and buying The PUPPET MASTER MONEY LENDERS a large BOX of PAXO with instructions to Follow. Countries need to control their own Finances, NOT MONEY LENDERS.
– KP, Guisborough, United Kingdom, 27/9/2012 14:17 We need to find the odd few trillions to pay off the “money lenders” first!

Stu Pidd
,

Smarter than the ave DM reader,
27/9/2012 14:20

Has anybody thought of Government’s Controlling their own Finances, and buying The PUPPET MASTER MONEY LENDERS a large BOX of PAXO with instructions to Follow. Countries need to control their own Finances, NOT MONEY LENDERS.

KP
,

Guisborough, United Kingdom,
27/9/2012 14:17

The FTSE has gained over 10% in the past three months and the trend is still upwards. When the Euro was at 1.27 a month or so ago, the DM was predicting it would hit 1.33 “within a couple of weeks”. Despite the underlying problems with the Euro, the markets and the Euro are relatively stable. It’s best to read a serious paper on economic matters.

Stu Pidd
,

Smarter than the ave DM reader,
27/9/2012 14:17

How come Christiano Ronaldo has decided to join the protest?

Dinoman
,

London,
27/9/2012 13:25

This is what happens when all the countries are virtually owned by the banks. Like a street full of houses they are all mortgaged to the hilt. Billions of pounds / euros are being paid in interest by taxpayers to keep the financial institutions happy. Fortunately the banks are unable to reposses a country and throw the inhabitants out, however, instead they make their lives a misery. I wonder how many politicians have interests in these banks. Is it govenments running the banks or vice versa?

Mag
,

Cambridge,
27/9/2012 13:06

How can Spain be looking for a gigantic bailout of as much as 300B Euros and at the same time Moody’s is preparing to downgrade them to junk status. That means that the rating agency think they won’t pay the money back. You can only wonder where this is going to end, but when the end does come, it isn’t going to be pretty and those Eurocrats that allowed this insane situation to drag on and on will be the ones who are fully to blame. The club med countries should have been kicked out of the Euro at least a year ago. Countries with such enormous debt, unmanageable unemployment level should not be borrowing more money and should not be trying to be part the elite club that the Euro should have been. In my view the writing was on the wall last year when Portugal borrowed 80B Euros just to pay the interest on their debt. Utter madness.

Ian the original
,

Newbury,
27/9/2012 12:36

The French and German’s who concocted the Soviet Experiment ………the EU……….should be taken to the Hague along with Merkel and Sarkozy and the present and past Commissioners in Brussels and charged with Economic Crime Against Humanity.

john
,

kouvola finland,
27/9/2012 12:29

The views expressed in the contents above are those of our users and do not necessarily reflect the views of MailOnline.

Leave a Reply

You must be logged in to post a comment.

Get Adobe Flash player