The Spanish rescue can wait

Shortly before the stock market closed on Tuesday, rumours on an impending decision by Madrid to ask for a rescue package triggered a sharp upswing in financials. An expected reaction as the mounting pressure on risk premium had badly hit the banking industry over the previous days.

The gloomy perspectives on growth and fiscal consolidation delivered last week a severe blow to prospects Spain might easily buy extra time before resorting to help. The comfortable coverage of public debt needs this year, had conveyed the impression it could delay at no harm any move on the rescue issue. Yet, markets tend to discount future prospects rather than past record. With outlook suffering a significant downgrade, the financial sector was bound to take the brunt of such a loss of confidence. Not to mention its spill-over effect on credit and output.

Are these rumours to be taken seriously this time? Business is pressing to end the current deadlock by filing the sooner the better a demand for help. It bets on a sweeping fall in differentials, following a massive intervention by the European Central Bank. Such a move would anchor the on-going financial restructuring process and help to alleviate the credit crunch that currently wreaks havoc on economic activity.

But Madrid has many reasons to remain cautious on the merits of embarking itself on a no-return ticket to euro-assistance. It lacks any certainty on the scope the ECB intervention might take. Should it only act once a high risk premium threshold is attained, hopes for a sweeping improvement of financial conditions would vanish. Neither has Spain received any firm commitment on the expected easy-to-live-with conditions attached to the rescue package. In short it doesn’t know for sure the price to pay and the concrete benefits to be reaped.

Its early insistence on the ECB ensuring a maximum differentials level had to be shelved as no independent central banker would readily accept being bound by predetermined targets.

Rescue would undoubtedly bring fresh money helping to bridge any foreseeable public funding shortage in the near future. Extra financial resources could be redirected in supporting the private sector, the likely fall in risk premium ensuring on face value a better economic climate. But the downside effects of becoming a rescued country could offset some of these gains. Worse than that, strict abidance to conditions under the rescue package would be subject to close scrutiny. Should markets fuel doubts on Spain’s ability in meeting the targets, they might react in a hectic way.

It would also put the ECB at odds having announced its firm intention to cut short interventions, should the beneficiary fail to fully enforce the commitments entered. In this key issue, the likelihood of fully respecting the budgetary targets looks rather dim.

With no time or way to avoid a plausible deviation at the close of this year, common sense invites to take as a starting reference next year’s performance. Delaying for some weeks the call for help does make sense.