Reports and counter-claims that Spain is on the verge of a bailout have left economists and investors confused but still apparently convinced a Spanish rescue is coming, if not quite yet.
Yields on Spanish sovereign bonds eased Tuesday on reports that the centre-right government of Prime Minister Mariano Rajoy would request a bailout as early as this weekend as more evidence emerged that the sinking Spanish economy has yet to reach bottom.
Quoting unidentified European sources on the day that Spanish unemployment hit 24.6 per cent – Europe's highest – Reuters reported Spain was no longer resisting a bailout. "The Spanish were a bit hesitant but now they are ready to request aid," one of them said.
The Spanish government was quick to play down the reports. A Spanish news agency reported that Mr. Rajoy told 17 regional leaders of his Partido Popular party that the bailout speculation was wrong.
"If a news agency reports that we'll ask for aid this weekend, there can only be two explanations; that the agency is right and knows more than I do, which is possible, or that they are not right," Mr. Rajoy said. "But, if it helps, and you accept that what I say is more important than this leak, I say no."
Adding to the political and market confusion were the equivocal statements from German Finance Minister Wolfgang Schaeuble about a Spanish bailout, which would never go ahead without his approval.
On Sept. 21 Mr. Schaeuble told the Foreign Press Association in Berlin that "Spain needs no program because it is doing the right thing and can be successful."
But at the same event, he added that "what Spain needs is the confidence of the financial markets and that is where Spain has real problems."
This latter comment has led some economists to believe that Germany's anti-bailout stance may be not be rock solid.
"Such ambiguity probably fuels Madrid's willingness to 'hold out,'" Gilles Moec and other Deutsche Bank economists said in a research note. "Schaeuble's ambiguity may reflect the government's weariness at requesting from the Bundestag [German parliament] yet another transfer to Spain on top of the bank recapitalization loan."
The markets reflected the uncertainty about a Spanish bailout. On Tuesday, the European and American stock indexes fell, along with Spanish and Italian bond yields. But the euro was up fairly strongly and commodities were mixed. "Traders have found it difficult to get a sense of direction for equity markets or the euro as contradictory comments continue to ensure that European waters remain as muddy as ever," said IG market analyst Alastair McCraig.
Many economists and strategists think it is only a matter of time before a Spanish bailout is launched. That's because the Spanish economy is still going in the wrong direction. Almost every private forecast suggests Madrid's projection forecast of a 0.5-per-cent economic contraction in 2013 is highly optimistic. A fall of 1 per cent to 2 per cent is the range of most forecasts.
Observers also think a bailout is coming because the European Union does not want a repeat of Greece, Ireland and Portugal, each of which resisted bailouts for months, only to accept them when they found themselves shut out of the debt markets, spreading financial chaos throughout Europe. Some EU countries, including France, have urged Spain to seek assistance while it can still fund itself, albeit at expensive levels, for fear that a waiting game risks a genuine crisis, one that would spread quickly to the larger Italian economy.
While Mr. Rajoy insists no bailout is imminent, he has lobbied for months for the European Central Bank to relaunch its sovereign-bond-buying program. Last month, the ECB agreed to buy short-term bonds in the secondary market, but only if the distressed country first asks for assistance from the new bailout fund, the €500-billion ($636-billion) European Stability Mechanism (ESM).
It is widely assumed that last week's tough Spanish budget, whose goal would cut the budget deficit to 4.5 per cent of GDP in 2013 from 6.3 per cent this year, was aimed at convincing the EU that Spain has done all the preparation work for a bailout that would come with light conditions. Deutsche Bank said Madrid used the budget to convince the EU "that there's nothing more the EU should ask from them in exchange for EDM/ECB intervention."
Deutsche Bank said it believes Spain may be only "weeks away" from a bailout and that Mr. Rajoy is likely to wait until after regional elections in Galicia and the Basque country on Oct. 21 before asking for one. A bailout before then could throw the elections into turmoil because voters probably would punish Mr. Rajoy's party for the loss of sovereignty associated with bailouts.