By TraderVox.com
Tradervox.com (Dublin) – Prime Minister Mariano Rajoy has refused to ask for bailout from the European Central Bank. In the official statement, Spain has refused to request aid from OMT as it tries to understand the situation. Rajoy has been quoted repeatedly saying that the government is evaluating its options and what it would mean if the country requested for bailout by signing the Outright Monetary Transaction contract. However, there are other pertinent issues in the country that have resulted to the delay in requesting for help.
Some of the reasons for this delay include the temporary improvement of the market conditions in Europe. After Mario Draghi, the European Central Bank President, announced that he will do anything possible to save the euro, confidence returned in the region and the government borrowing cost reduced with short-term and long-term bond yields falling. The low yields have lowered the pressure on Spain to ask for help. Another pertinent issue is the regional elections to be held in October. It is in the best interest for Mariano Rajoy to hold this request as this will provide a higher chance of winning the election.
Another reason that has been given for the continued delay, is that the government wants to deal with one issue at a time. Rajoy has made a significant change in VAT, increasing the medium level VAT to 10 percent from 8 percent. The higher level was pushed to 21 percent from 18 percent. This has caused many products to move up; together with other cuts, this has caused an outrage in the country. As such, October is seen as a bad time to upset the public. The lack of pressure from Germany has also lessened the probability of Spain requesting for bailout in October. According to Germany’s calculation, Spain’s request would upset further the German public which is not supportive of the ESM fund.
These conditions will have weathered by the end of October hence the country will be in a better position to request for bailout. The market conditions are expected to change as we head to the end of the month and the internal elections will be over. In addition negotiations between Spain and EU peers are expected to be completed this month. With worsening conditions and increasing pressure, the Spanish and German publics are expected to be ready by end month. However, if Spanish yields shoot, the Spanish government may request for bailout sooner than later.
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