Eurozone debt crisis: Clouds gather over Spanish Prime Minister Mariano Rajoy as EU bailout nears

MADRID: Spanish Prime Minister Mariano Rajoy faces a cloudy return from his short summer break as his expected request for European aid in September will spur protests on the street and deepen cracks emerging in his conservative People's Party.
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Aug. 9, 2012 - PRLog -- Rajoy's popularity plummeted in the first seven months of his 4-year term as his communications faltered while he enacted successive austerity plans and the euro zone's fourth biggest economy sank into recession with unemployment over 24 per cent.

With borrowing costs painfully high - the yield on Spain's benchmark 10-year bond is unsustainable at close to 7 per cent - Rajoy is expected to make a formal request for coordinated action from the euro zone rescue funds and the European Central Bank.

A rescue plan of EU buying of Spanish bonds, or a precautionary credit line, would reduce market tension but also come with harsh conditions at a time when protesters have taken to the streets against budget cuts.

The Socialist opposition rejected an earlier agreement for a 100-billion-euros European rescue for Spanish banks and is also against a sovereign bailout, and there are now even voices against it within Rajoy's ruling People's Party (PP).

Privately, senior party members have begun to blame Rajoy - an unlikely crisis manager with a cautious demeanour - as Spain is dragged deeper into the 2-1/2-year-old euro zone debt debacle.

While Rajoy has an ample majority in Parliament that has not shown signs of breaking, PP leaders in the country's 17 autonomous regions have begun to rebel against tight spending controls that have forced them to cut back on hospitals and schools and face political backlash.

"We're united behind him but it is not wrong to say that there is a diversity of opinions which are now being expressed," a senior PP member told Reuters.

When asked if a cabinet reshuffle or even a change of prime minister was an option being considered in the party, the PP member said "in the current context, anything is possible."

Analysts say Rajoy will probably have to make changes in his cabinet around the time he formalises the request for aid, to appease disgruntled factions in the party and angry Spaniards.

"In order to make it politically digestible, the request for EFSF/ESM aid might come together with a cabinet reshuffle," Citigroup said in a note to clients, referring to the European Financial Stability Fund and European Stability Mechanism, the EU's temporary and permanent rescue funds.

Market, peer pressure

Spain has so far managed to continue selling sovereign bonds at public auctions, although paying a high price, and doesn't face big debt repayment humps until the end of October.

For that reason the consensus view from financial analysts is that Rajoy will make an announcement in September accepting a two-year programme.

Unlike the rescues of Greece, Ireland and Portugal, which removed them from markets for years, the idea is that Spain would continue to issue debt after receiving aid.

Rajoy, who returns from holiday the third week of August, last week said he needed to know more about the conditions for such a rescue, dubbed a "rescue-lite".

The ECB is likely to provide details at its monthly meeting on September 6 and euro zone finance ministers are expected to discuss a potential programme when they meet informally in Cyprus on September 14 and 15.

Analysts said the market had started to price in the rescue and a failure to act from Madrid would be a huge disappointment to investors who are now looking at the "when" and the "how" rather than the "if" of a bailout.

In its note, Citigroup said the total amount of European aid should cover gross issuance until mid-2014, or 306 billion euros ($380 billion).

#EURUSD, $FXE, $FXD, Spain, Eurocrisis, #LTRO, -noise
Source:Associated Foreign Press
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