The newswires have today been full
of speculation over the imminence of a Spanish bailout. The FT has reported this
week that negotiations between Spain
and the EU are going places. The two parties are working on an economic reform
programme which is rumoured to be unveiled next week. Note though, this is only
a prelude to a bailout request.
What is Spanish PM Rajoy waiting
for? Well, regional elections in the Basque country and Galicia are
being held on October 21 and Rajoy is likely to wait until after that, as a
bailout request before this date would more likely than not damage his
Conservative party’s chances. This end of October period coincides with some major
Spanish debt repayments and is probably as long as the market is willing to
wait for some concrete progress.
There is something to be said for
getting in early with a bailout request whilst bond yields are away from their record
highs, so that Rajoy is in a better position to negotiate favourable bailout
conditions. If Rajoy waits until the situation returns to panic mode, Spain ’s
creditors could have him over barrel.
Next Friday’s release of the
Spanish banking sector’s stress tests could well spook the markets and send
bond yields soaring up to 7.0% again but on balance we expect Rajoy to wait
until late October, just in time for the ECB’s meeting in the first week of
November. This leaves time for bailout conditionality to be ironed out between
the interested parties.
We believe Rajoy will use the next
month to try everything he can to achieve the best result for his country. He
is under huge domestic political pressure by an increasingly angry and volatile
population and cannot afford to be seen to sacrifice more than is absolutely
necessary in return for a bailout. Everything should be in place by the end of
October and until then, the euro is likely to come under increasing selling pressure.
Richard Driver
Currency Analyst
Caxton FX
