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Rampant talks and discussions on Spain’s future seem to be yielding results as the much talked about 500 billion euro rescue fund is to be launched later in the week; with Spain expected to be the first country to gain access to the fund.
However, despite thenews of an imminent bailout fund release, several politico-economic analysts have pointed out that Spain may not seek help from the fund after all. The socio-political issues in the country seem to be mounting by the day;and resistance at home to looming austerity measures and declining bond yields seem to have led to the Spanish government employingsome measure of caution in its stance on the European Stability Mechanism (ESM).
David Carbon, managing director of economics and currencies at DBS in Singapore, told CNBC Asia’s “the Call” that Spanish 10-year government bond yields, the benchmark for borrowing costs in the country, are currently around 5.7 percent. Yields have inched down since July, when they spiked above 7 percent, rattling financial markets and triggering tough talk from the European Central Bank (ECB) to do “whatever it takes” to prevent the euro zone from collapse”.
The question however remains – for howlong would Madrid continue to enjoy the respite provided by lowering bond yields? Analysts have pointed out that the yields would soon come under intense pressure as investors begin to eventually lose patience with the drag-footing of the Spanish government.
“Spain seems to be in no rush to ask for help but the markets are and the longer Spain waits, the more pressure we will see on yields again,” said MitulKotecha, head of global currency research at Credit Agricole in Hong Kong.
Nevertheless, irrespective of whether Spain eventually seeks immediate help or not, the ESM will formally be launched at a Euro zone finance ministers’ meeting. And one thing is for sure; investors will definitely be waiting for “action time” from the government, but for how long they would be willing to wait is another question entirely.
However, with the protracted crisis in Europe, one thing that the ESM will achieve, irrespective of Spain’s action or inaction, is successfully reducing the tension in the region. This is considering the fact that much of the tension has been caused by the inaction or delay in action on the part of the Union.
Moreover, the ESM will, at the very least, demonstrate to investors that the Union has provided an effective firewall against the most catastrophic of risks. But whether Spain chooses to cling to this new found hope or not is entirely up to her.
According to Geoff Lewis, global market strategist at JP Morgan Asset Management, “the delays are not helpful and Spain is not coming to the table, but the tail risks have been contained and the ECB is there as a backstop”.
