Major boost for Rajoy after tough six months

Sat, Jun 30, 2012, 01:00

SPAIN:THE DECISION by EU leaders to allow EU funds to be funnelled straight into troubled banks, rather than via national governments, is a major boost for Spain’s prime minister Mariano Rajoy.

This change to regulations, which will come into effect once a new European banking supervisor is in place, has been in the sights of the conservative leader for some time, particularly since June 9th. That was when his government announced that Spain’s banking sector needed a bailout worth up to €100 billion.

There is a logical economic argument behind Mr Rajoy’s keenness to change the rules: funnelling the funds straight into the banks means the Spanish treasury does not have to take on the burden of the loan. This ensures that the bailout money does not become new sovereign debt.

Spain has watched its borrowing costs soar to record levels in recent weeks in great part because of doubts over the health of its banks and worries that the bailout would increase its sovereign debt.

This move by the EU keeps the new obligations of the banks at arm’s reach from the government, a strategy hailed by the post-summit statement, which said it was “imperative to break the vicious circle between banks and sovereigns”.

Mr Rajoy has been in office almost six months and his tenure so far has been decidedly rough. His Partido Popular’s majority has allowed him to implement a programme of severe austerity and reforms, as he tries to slash the deficit in line with EU targets. In the process, however, the recession has bitten harder, his popularity among Spaniards has nosedived and the notion that he is merely taking orders from Brussels and Berlin has taken root.

Mr Rajoy has not been helped by a poor communications strategy and a series of dramatic U- turns on sensitive issues.

Having said shortly before taking office that he would not raise taxes, he then proceeded to do so days later. In another more notorious instance, he categorically denied that Spain would request a bailout for its banks, 10 days before the country announced it was doing just that.

Given these circumstances, there is a political element to the concessions Spain squeezed from its European partners at the summit. Mr Rajoy is determined to ensure his country’s bailout is not seen as such, an attitude reflected by his government’s oft-ridiculed refusal to even use the word.

The change to the way EU money will be injected into troubled financial sectors means Mr Rajoy can argue that this particular rescue has little in common with those of Greece, Ireland and Portugal, because it will be the banks’ burden, not the Spanish government’s. If Spaniards are convinced, this will quieten, in the short term, those who claim Mr Rajoy is ceding sovereignty to powers to the north.

“I think Spain has reasons to be happy,” said European Commission president José Manuel Barroso after the summit. Mr Rajoy will undoubtedly agree.