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European markets have been on a tear recently since the latest ECB meeting in which Mario Draghi was seen as giving a clear commitment to supporting eurozone sovereigns as long as government leaders commit to taking proactive measures themselves, like formally requesting a bailout from the eurozone’s established bailout funds, the EFSF and ESM. Spanish stocks have outperformed U.S. stocks by 11.3 per cent in the past month. Comments by EU economic minister Olli Rehn that suggested Spain had “an open mind” on requesting a bailout last week have helped fuel the rally.
This caused many to expect Spain to make a formal request for a bailout from the EFSF/ESM, thereby triggering the next step in the process of receiving bond market support from the ECB. The ECB is seen by most to be the only entity with the firepower available to adequately address the crisis in Europe.
However, Spanish finance minister Luis de Guindos said this weekend that the Spanish government won’t request a bailout until the ECB gives some specifics on the kind of help it’s willing to give Spain once it does so.
The ECB earlier this month signaled that it would consider intervening if Spain asks the European Financial Stability Facility, the euro-zone’s temporary bailout fund, for aid and enrolls in a formal program. The Spanish government has said it will decide whether to make such a request after the ECB provides more details on the type of support it would offer. This information could come after the central bank’s Sept. 6 policy meeting.
Mr. de Guindos’s comments to Spain’s state-owned news agency EFE, confirmed by a Finance Ministry spokeswoman, gave the most explicit indication to date of what his government is looking for.
The ECB “cannot place limits or say how much it will buy nor for how for how long it will intervene” in secondary sovereign-debt markets, in order to ensure the action is effective, Mr. de Guindos was quoted as saying. Previous ECB bond purchases were widely seen as too timid to be effective in calming market turmoil.
De Guindos is clearly worried that Spain will ask for a bailout and the ECB’s policy answer will be seen as less than adequate by markets, which would be very damaging for sentiment in peripheral bond markets, which have already had a pretty tough year.