Political flux in Italy sparks fear of Spain seeking bailout


There was renewed speculation yesterday that Spain will request a sovereign bailout after the country’s borrowing costs spiked due to the political uncertainty in Italy.

The market turbulence was attributed to Italian prime minister Mario Monti’s announcement that he will resign and the news that Silvio Berlusconi is returning to politics.

There has been speculation for several months that Spain will join Greece, Ireland and Portugal in asking for a rescue, with the country’s bond spread rising to unsustainable levels during the summer.

In June, Madrid requested an emergency loan package for its banks, but prime minister Mariano Rajoy has resisted moving for a sovereign rescue and the markets have been relatively calm in recent weeks.

The European Central Bank has said that if Spain requested a bailout, it would buy up the country’s bonds on the secondary market to bring borrowing costs down.

Doubts over stability

But as costs rose again yesterday, Spain’s economy minister, Luis de Guindos, said the country is still mulling the option over. “When doubts arise about the stability of a neighbouring country such as Italy, which is also seen as vulnerable, we are immediately affected,” Mr de Guindos said of the market turbulence.

Pressure is building within the private sector for Madrid to secure the ECB’s assistance to bring down interest rates.

Yesterday, the influential El País newspaper warned that delaying the bailout would unnerve investors, hurting the private sector and prolonging the country’s recession.

“The government and Spaniards know that the request from the ECB will be made sooner or later,” said the paper’s editorial.

“The risk premium’s stability of recent weeks is merely a mirage.”