Spain Continues to Resist Pressure for Bailout

This refusal on the part of Spain to request a bailout, and the nasty conditions that would follow, so the European Central Bank can put its bond-buying program into motion, has really frustrated those trying to stage-manage Europe. The credit rating agency Standard and Poor’s, in league with these forces, downgraded Spanish debt to increase the pressure.

S&P said it had lowered the rating on Spain’s debts two notches following a slump in its fortunes that meant its recession would be longer and unemployment higher than expected.

The agency also cited the increase in social unrest and the probable rise in tensions between central government and the regions.

“The downgrade reflects our view of mounting risks to Spain’s public finances, due to rising economic and political pressures,” said the ratings agency. “In our view, the capacity of Spain’s political institutions (both domestic and multilateral) to deal with the severe challenges posed by the current economic and financial crisis is declining, and therefore, in accordance with our rating methodology, we have lowered the rating by two notches.”

This is, to borrow a phrase, malarkey. S&P knows full well that the biggest threat to the Spanish economy comes from having to accept the bailout, which will only extend the economy-crushing austerity programs further. So in service to a bond market that wants to see the mass purchases, they downgrade Spanish debt. It’s made very explicit at the end of the story that further downgrades can only be avoided by asking for the bailout.

Furthermore, the IMF, which just got done showing that the fiscal multiplier for austerity in the current circumstances was much higher and more damaging than they expected, joined the chorus calling on Spain to seek the bailout. But Spanish Prime Minister Mariano Rajoy is following the markets, which have already priced in the bond-buying:

Prime minister Mariano Rajoy, however, struck a defiant tone when he said that tough labour reforms and the rebuilding of its tarnished banking sector meant the IMF’s dire forecast for Spain’s economy would not be realised.

“If we follow that strategy … we’ll see that the reality turns out to be better than the forecasts,” he said.

Rajoy’s position was strengthened as Spain’s key 10-year bond yield remained unchanged on Thursday despite the S&P move. He is thought to want to wait at least until after regional elections on 21 October to ask for aid and even later if the European Central Bank’s bond buying keeps borrowing costs down.

Rajoy has made clear that, as long as debt service remains affordable for Spain, a bailout is unnecessary. This should please everyone in Europe, but the real design of the ECB is to take sovereignty from Spain and force changes to their labor market. They did not want the expectations channel to work so well.

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