Rajoy, Merkel say did not discuss aid conditions

Thursday 06 September 2012 19.09
Mariano Rajoy declined to comment on whether Spain would make an official request for the ECB help
Mariano Rajoy declined to comment on whether Spain would make an official request for the ECB help

Spanish Prime Minister Mariano Rajoy refused to be drawn today on whether his government would tap the new European Central Bank program.

During a visit by German Chancellor Angela Merkel, Mr Rajoy declined to comment on whether Spain would make an official request for the ECB help.

The help would be subject to conditions and likely-monitored by the International Monetary Fund.

"When I have something new, I'll communicate it," he said at a press conference alongside Mrs Merkel.

However, Mr Rajoy, who was speaking after ECB president Mario Draghi outlined details of a big change in the central bank's bond-buying program, left the door open for a request.

Spain "must control its public finances," he added.

Mr Rajoy added that the wave of tax hikes and spending cuts he has pushed through since January "are very difficult measures and difficult to explain, but in the situation that we're in, we have to do it".

Mrs Merkel praised Spain's efforts and said the two leaders discussed a separate bank rescue package aimed at propping up the country's lenders hurt by a property boom that went bust, and the deteriorating financial condition of Spanish regional governments that function much like US states.

Mrs Merkel insisted that the two did not discuss extra measures Spain would be required to take if the ECB were to start buying Spanish bonds.

"We didn't discuss anything about possible conditions," Mrs Merkel told reporters. "I didn't come here to say what reforms Spain must make."

Spain's government has been pressing for months for the ECB to buy Spanish bonds, but has stressed that it should not be forced to impose more austerity on a country already reeling from a deep recession, unemployment of nearly 25% and no economic relief in sight.

Many analysts think Spain will have no option but to ask for help because it can not afford to fund itself with the high interest rates being demanded by investors.

"Now the ball's in our court," said Jordi Fabregat, a financial management professor at the EASDE Business School in Barcelona.

Spanish Economy Minister Luis de Guindos insisted today that his country has already made significant progress this year with labor reforms and efforts to reduce a growing deficit that include deep spending cuts for cherished government programs like national health care and education.

"Spain is doing what Germany did 10 years ago," Mr de Guindos told a gathering of Spanish and German business leaders at the presidential palace ahead of the Rajoy-Merkel meeting.

Over the last decade, Germany has raised its retirement age, amended its constitution to require a balanced budget and put in place labor market and welfare reforms. A key round of measures in 2003 reduced job benefits and protections - and was criticised at the time for cutting away at a cherished social welfare system.

Spain held a successful bond auction before Mrs Merkel's arrival, selling €3.5 billion in bonds maturing over the next four years and at rates far below similar auctions held during the summer. The sale also hit the top end of the government's goal of selling between 2.5 billion and 3.5 billion.

Those maturing in 2014 had an average interest rate of 2.8%, down from 4.7% in June. Bonds maturing in 2015 had a rate of 3.7%, down from 5.1% from a July auction. And bonds due for payment in 2016 fetched a 4.6% rate, down from 5.1% in August.

The interest rate in the secondary market for Spain's benchmark 10-year bond fell nearly 0.30 percentage point to 6.11% by this afternoon after Draghi fleshed out the new bond-buying program. The rate has shot up above the 7% mark several times in recent months - the same level that forced Greece, Ireland and Portugal to ask for bailouts.