An anonymous Spanish government official announced what is obvious to anyone perusing bond yield statistics: they don’t need to request a formal bailout from European authorities.

Spain is feeling less pressure to seek European financial aid in the short term because its state borrowing costs have dropped since the European Central Bank announced its offer to buy bonds, a government official said Wednesday.

The official, who spoke on condition of anonymity in line with government policy, noted Spain’s borrowing rates in the bond markets had dropped since the ECB announced its plan, under which it would buy the government bonds of countries that ask for a European bailout.

Basically, the ECB declaration gave Spain the bailout they needed to finance government operations. Just look at the 10-year Spanish bond chart. The ECB made its announcement on September 3, when the 10-year bond yield peaked at 6.85%. Within four days, that yield dropped to 5.6%, and it’s basically been there ever since. The bond market knows that if they ramp up yields by demanding a higher price, Spain can just ask for their bailout and begin the ECB bond purchase program, which will push yields back down. This implicit guarantee works exactly like the implicit bailout guarantee for mega-banks works in the United States to limit borrowing costs. And Spain has mostly covered their borrowing for 2012 in the markets already, so even a rise in the last two months of the year wouldn’t affect them terribly.

Now, the problem for Spanish citizens is that this has not stopped the government from imposing some of the conditions that Europe would be expected to impose on Spain in the event of a bailout request. They have proposed more austerity measures despite 25% unemployment and a collapse in retail sales and lending. Capital outflows are up 620-fold in 2012 relative to 2011 (though those outflows are slowing somewhat). Manufacturing is drying up. The country is in desperate need of fiscal transfers which aren’t coming.

But the ECB wanted to impose additional “conditions,” including “labor market reforms” (which is a nice way of saying union busting), in exchange for the bond purchasing. The didn’t anticipate that the mere intention to purchase bonds would depress yields without them having to buy anything. It appears that the ECB outsmarted themselves.

David Dayen

David Dayen