Rajoy real winner despite Monti delight

Posted on June 29, 2012

At the end of a two-day summit where eurozone leaders unexpectedly took decisions to help Spain and Italy escape the relentless pressure of the financial markets, it was left to Italy’s prime minister to declare victory.

“It is a double satisfaction for Italy,” said Mario Monti, a reference to both Italy’s victory over Germany in the European football championships and his outflanking of the German chancellor, Angela Merkel, forcing her to agree emergency measures she had for months said she would not accept.

    But for all of Mr Monti’s chest-beating, the real winner in the early-morning deal was not the courtly economist. It was his Spanish counterpart, Mariano Rajoy.

    For the first time since the outbreak of the crisis two years ago, a huge and some would say inevitable bailout of Spain’s teetering domestic banking sector, stuffed with bad real estate investments – will no longer be Madrid’s responsibility.

    Instead, the eurozone’s €500bn rescue fund, the European Stability Mechanism – meaning taxpayers for all 17 eurozone countries, Germany foremost among them – will shoulder the burden of €100bn in cash injections. The total Spanish needs are expected to be decided by the end of July.

    According to EU officials involved in the deliberations, the focus on Spain was intentional. Despite Mr Monti’s uncharacteristic grandstanding in recent days, leaders have been far more concerned about the structure of the Spanish bank bailout, fearing it was spooking financial markets and pushing Madrid inexorably towards a full-scale bailout that would eat up almost all of the eurozone’s rescue funding.

    The EU’s Spanish bank bailout was originally to be funnelled through the Spanish government, adding to Madrid’s already burgeoning debt burden. But since the decision was announced earlier this month, Spanish borrowing costs have spiked, leading officials to fear they were chasing private investors out of Spanish bonds by adding to Madrid’s debt.

    In addition, the bailout loans for Spain were to be senior to all private sector lending, angering private bondholders who saw EU governments jumping the repayment queue; under the new plan agreed on Friday, loans for Spanish banks will be treated as equal to all others.

    “The fact there were specifics for Spain is a reflection that the situation in Spain was more acute,” said one official briefed on the deliberations. “They simply felt they had to do something for Spain now.”

    For Mr Monti, however, there was far less to crow about. He had gone into the summit asking for measures that would automatically trigger the bailout fund if Italian borrowing costs rose to unsustainable levels.

    Instead, he received an agreement that if the existing bailout fund were used to buy Italian bonds at auction – one of the pre-existing possibilities open to Rome – it would come with a lighter set of conditions than under current rules.

    But even that concession was called into question on the second day of the summit. German officials were said to be irritated by Mr Monti’s public claims of condition-free aid, and Finnish and Dutch officials proved even more hardline than their German allies, insisting there had been no changes whatsoever.

    “It is absolutely clear that all the decisions taken last night were under the explicit understanding that the conditionality would remain unchanged,” said a Dutch official. A senior Finnish official added: “They haven’t been changed at all.”

    Herman Van Rompuy, the president of the European Council who brokered the late-night deal, sided with Mr Monti’s interpretation.

    Regardless of Mr Monti’s and Mr Van Rompuy’s interpretation, without Dutch and Finnish acquiescence, Italy will still be faced with a full-scale monitoring programme from the European Commission and the ECB if it chooses to avail itself of bond-buying aid.

    Mr Monti was equivocal when asked if he intended to request such a programme: “Italy doesn’t plan to activate the mechanism for now, but I don’t exclude anything for the future.”

    Despite the uncertainty surrounding Mr Monti’s victory, the technocratic prime minister’s performance was hailed in the place he most needed it: the bond market. Benchmark 10-year Italian bonds saw yields drop to 5.8 per cent yesterday, dropping below 6 per cent for the first time in days.

    Additional reporting by Joshua Chaffin and Quentin Peel in Brussels

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