Being rescued doesn’t amount to be saved

Community jargon shows how mere wishful thinking is turned into what seems a rock-solid reality-to-be. The EU is full of expectations that never materialize. Yet, this shortcoming does not deter officials from bombastically naming policies or mechanisms as if there was no chance they might derail. Just take the rescue label so often applied to Greece. One takes for granted that once you are rescued from peril you can consider yourself fortunate. As it doesn’t make sense that Greeks might willingly plunge once and again into dangerous waters for the sake of being salvaged, it would appear that rescue doesn’t amount to getting out of trouble.

Spain should learn that lesson, now that it is being hastily pushed into wearing a life-jacket. The ECB and the leading partners feel afraid that Spain might spin off out of control putting under severe strain the whole Euro zone. For a while the government nurtured the hope that this alarm bell would soften others in accepting a unilateral debt buying scheme by the ECB with no conditions attached to it. Yesterday Draghi cut short this free lunch dream. He made crystal-clear that intervention on the short end of the debt secondary market would be subject to a previous full-fledged rescue with tough conditions imposed by the European Council.

Now that Madrid is cashing a significant drop in risk premium, in the aftermath of the ECB announcement, it is in no hurry to ask for help. Especially as it fears bearing a heavy toll in the incoming regional elections in its Galician stronghold. But buying time might backfire. The government hopes reducing conditions to meeting its budgetary commitments thus downplaying rescue as if it was a pain-free ride. This strategy can only hold should fiscal target be achieved. As it goes, it is likely to be largely missed. At the end of June the central government’s deficit amounted to the whole 2012 objective. A really nasty perspective that increased taxes will prove unable to redress in the coming months. The Social Security budget, dented by increasing unemployment, has markedly deteriorated while regional accounts are plunged in utter shambles unable to cope with essential current expenditure in the current month.

Just imagine Spain gets a rescue deal by the end of October, and flatly fails to meet its fiscal targets at the close of the year. According to Draghi’s rulebook, the debt buying programme would come to a sudden halt sending the Spanish sovereign into a free-fall drop. But well before that happens, the markets would scent the danger and start their mercilessly attacks. Unless drastic measures are swiftly implemented, Spain might experience the frustrating sentiment that being rescued does not provide any safe shelter.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.

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