Spain moving closer to EU bailout

debtThe last day of the trading week has been dominated by rumors regarding the possibility of Spain asking for EU bailout. European markets and the euro greeted the news with gains.

The Spanish government is debating on Friday over the set of austerity measures, which need to be implemented in order to reduce spending and to meet the conditions of a potential EU rescue program. The steps discussed include a rise of the retirement age as well as a pension freeze.

According to sources familiar with the matter, Spanish authorities have already decided to push through with the hike of the retirement age from 65 to 67 over a 15-year span. The abolishing of the annual pension increase is still being debated though. The final decision and the final approval of the austerity package is supposed to take place on September 27, according to Deputy Prime Minister María Soraya Sáenz de Santamaría.

Should the debated measures be implemented, they would bring savings of approximately 4 billion euros and The Spanish government would also assure investors this way of their determination to carry out the structural reforms, despite the delay.

Capital Economics team of analysts believe that the time is ripe for Spain to formally request a EU bailout: “So far at least, the Spanish Government’s decision to delay seeking a bail-out does not seem to have backfired. After all, Spanish government bond yields remain low by recent standards. But the Government would be unwise to wait too much longer. After all, if markets were to conclude that the ECB’s OMT programme might not ever be used, Spanish yields could quickly shoot back up to their summer highs. In such a scenario, Spain would suddenly find itself in a much weaker bargaining position to negotiate favourable conditions on a bail-out.”

EU confirms talks with Spain on austerity plan, not aid

The European Commission spokesman confirmed on Friday that Spain is in talks with the EU about the package of austerity measures, which is supposed to be announced next week.

According to the spokesman, this does not imply that Mariano Rajoy's government is preparing a formal request for EU aid. “Taking forward structural reforms is the best way for Spain to restore confidence,” he told reporters.

During the week, many contradicting comments were made on the issue of the potential Spanish rescue. In an article published overnight, FT confirmed that EU and Spanish authorities are working on a bailout program. This was later denied by Italy’s finance undersecretary Gianfranco Polillo, who told Bloomberg that neither Italy nor Spain will voluntarily ask for EU aid.

EU and Spanish authorities working on bailout program - FT

EU authorities are presumably, according to FT reporters Peter Spiegel and Miles Johnson, working behind closed doors on a an aid package to Spain as well as preparing for an open-ended bond purchases program by the ECB. Brussels is reportedly helping Madrid to tweak an economic reform plan thought to be announced next week, the FT reports.

From the FT: "According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested. The plan will focus on structural reforms to the Spanish economy."

Greece and Troika not reaching deal

Negotiations between Greek officials and the Troika inspectors continued on Thursday, but no agreement has been reached on the package of budget cuts amounting to 11.7 billion euros, required before the next tranche of the EU bailout can be released. Therefore, the Greek authorities plan to push for a two-year extension of the deadline to pay back the loans.

Greek Finance Minister Evangelos Venizelos informed in the European afternoon that the deadline for presenting the package of budget cuts, fixed for September 23, will be missed and the talks will continue next week.

Social disagreement towards the unpopular measures, which include reductions in wages, pensions and welfare benefits, has been rising in Greece and labor unions have been organizing various protests against them. They have also called a general strike for September 26.

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