Spanish Prime Minister Mariano Rajoy's equivocation on seeking a European bailout amounts to a bet that another bout of market turmoil will enable him to broker better terms over German resistance.
Defending Spain is crucial because its economy doubles the output of Greece, Ireland, Portugal and Cyprus combined, testing the capacity of aid mechanisms. Its borrowing costs are a reference for Italy and even France, which has so far seen its yields contained even with unemployment at a euro-era record, the economy stagnant and its debt levels climbing.
Spanish bonds have rallied since the ECB announced its willingness to unleash unlimited firepower to defend struggling sovereigns. The gains have encouraged Rajoy to avoid triggering the aid as demonstrators and regional leaders step up protests against budget cuts. More austerity would probably be required to access the deal with euro governments demanded by the ECB.
Stalling has been a tactic Rajoy has used with limited success. His People’s Party lost the regional election in Andalucia in March even after he delayed announcing unpopular measures until after the vote. Bond yields rose through the spring as he deflected pressure to set up a so-called bad bank to clean up the financial system.
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