Markets in the US and Europe rose today on this Financial Times story, suggesting that Spain would submit to a bailout request. The stabilization of sovereign debt yields in Spain as well as the anti-austerity forces threatening the political class raised hopes that Spain would not take this step. And it’s still a very dicey scenario for a Prime Minister who vowed not to hand over decision-making capabilities for his country to unelected bureaucrats in Brussels.

But the report itself tried to frame this in terms of something less than a bailout. The Spanish leadership wants to call it a credit line. This actually sounds worse to me:

A senior official within the Spanish ministry of economy said Spain did not require any money from the European Stability Mechanism, the eurozone’s state rescue fund, but would be comfortable making a request for a credit line only in order to satisfy the conditions of the ECB to begin buying bonds.

Before this can happen, there would have to be agreement over timing with Spain’s European partners – breaking with market perceptions that one of the main reasons for a delay was the reluctance of the government of Mariano Rajoy to take the politically damaging step of requesting aid. Some European officials have been frustrated by Spain’s apparent reticence to take a step that would benefit its economy.

Lawmakers in Germany, the key country needed to assent to this scheme, gave it positive remarks today, so this looks to be the way things are moving.

It’s unclear what a precautionary credit line would mean for Spain. The ECB would be able to start their bond-buying program, with their commitments satisfied. But would Spain be forced into labor market changes as a result? Their most recent budget already added a degree of austerity, perhaps what the troika would have sought anyway.

Certainly, economists and the ruling class have ganged up on Spain, demanding that they agree to the aid request. The credit line fudge may allow the Prime Minister to say that he retained sovereignty while improving the economy. But it’s not entirely clear what’s being agreed to here. At any rate, the continent is moving toward stripping sovereignty, with the German Finance Minister’s plan of a “currency commissioner” who can veto national budgets looking like the end goal.

Spain certainly has a sick economy, but the prescriptions offered by the outsiders are worse than the disease.

David Dayen

David Dayen