MacroScope

Don Rajoy de la Mancha: Spain’s “quixotic” adventures

October 3, 2012

 

Spain will not seek aid imminently, says Prime Minister Mariano Rajoy. And by imminently, he means, not this weekend. Just the latest twist in a European crisis plot that now sees Spain as its primary actor.

The focus on Spain’s reluctance to see foreign aid, a pre-condition for additional European Central Bank purchases of its bonds, is ironic given the country’s record of goading weaker counterparts into similar rescue packages earlier in the crisis.

To Lena Komileva, chief economist at G+ Economics, the saga is all too reminiscent of the hapless meanderings of Don Quixote. Komileva argues that the country’s latest budget announcement marks only the beginning of a deeper, almost circular plight:

Perhaps this budget and the bank recapitalization efforts that will follow the stress tests will convince the markets that Spain will receive the EU’s political endorsement and with it the financial support that is critical to lowering the cost of capital for the Spanish economy before the year-end. But the government’s reformist drive is hostage to divisive politics in Europe and at home, a deepening recession, and agnostic market attitudes towards any EU crisis-management policies that sacrifice growth. Even with the prospect of EFSF and ECB support for government and bank debt in sight, and the government’s Quixotic crusade for fiscal credibility, the question of Spain’s debt sustainability over time remains wide open.

 

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