October 4, 2012

Spain Stalls as ECB Council Meets

Rajoy still reluctant to seek aid as central bank keeps rates level

A month after Mario Draghi, head of the European Central Bank (ECB), announced his unlimited bond buying plan, Spain has yet to request aid. And while that is expected to be one topic of discussion at an ECB governing council meeting outside Ljubljana, the Slovenian capital, Draghi cannot act until Spain does. Meanwhile, the council kept interest rates at their present level of 0.75% in advance of additional data on inflation and the state of the eurozone economy.

Reuters reported Thursday that although yields on Spanish bonds have risen from the lows they achieved after the ECB’s bond buying plan was announced, Prime Minister Mariano Rajoy is not anxious to apply for help to the European Union (EU). Until he takes that step, the ECB’s plan is in abeyance.

Rajoy has a number of reasons for his hesitation. First, there is his hope to negotiate easier terms than currently on offer—an objective he shares with Prime Minister Mario Monti of Italy. Then there is Germany’s opposition, reiterated just days ago; there are also upcoming elections at home.

Another factor is his concern that a request for help may be seen as surrendering control over Spain’s policies to other countries, although analysts have said that it is unlikely that the ECB will impose any conditions on Spain other than those required by the EU.

"The ECB will not be setting additional conditionality, you cannot reasonably expect it to do that," said Unicredit economist Marco Valli in the report. Valli is of the opinion that once local elections are over later in the month, Spain will go ahead and ask for assistance.

The ECB fulfilled expectations of both analysts and economists in keeping rates steady. Analysts believe that the ECB is unlikely to cut rates until after the new bond buying program has begun. In a Bloomberg report, Christian Melzer, an economist at Dekabank in Frankfurt, said, “From an economic perspective, we don’t need another ECB rate cut.”

He continued, “The focus isn’t on rate changes but on Spain and a possible request for aid paving the way for the ECB bond program. It’s up to Spain to make a move now.”

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