Draghi disappoints on D-Day, but opens some doors

The president of the European Central Bank (ECB), Italy's Mario Draghi, had high hopes for his press conference held yesterday in Germany. But these hopes were partially deflated. The seventeen European central banks that met together decided to postpone making any decisions about whether to buy sovereign debt from Spain and Italy. This is dubious information for the markets, whose expectations have been high. The Ibex 35 dropped 5.16% after the disappointing press conference.

Despite initial bearishness in the markets, we should recall that the ECB has taken an important step by introducing the idea of adopting a new and unorthodox monetary policy at some point "in the next few weeks." Moreover, it has confirmed its willingness to buy Spanish and Italian debt if the countries finally opt to ask for a bailout through the European Financial Stability Facility (EFSF). These two decisions reaffirm the ECB's clear commitment to defend the euro, a commitment that the ECB president conveyed in statements made in London last week.

Because of political stigma and the increase in EU and German oversight involved, it seems that Spain does not want a bailout. For this reason, Mariano Rajoy remains firm with his decision to not ask for one. But there could be some hidden reasons behind his equivocating, such as the close relationship he has with Angela Merkel, who has become more receptive to Spain's struggle after meeting with leaders from the Spanish labor unions UGT and CCOO.

Prime Minister Rajoy is making the most of the fact that Mario Monti and Angela Merkel are out of sync by negotiating conditions that could prevent a Spain bailout. For example: getting the EU to back Spanish debt above 60% of the country's GDP. In any case, the ultimate decision that the Spanish government will make depends mostly on how markets behave. Yesterday they overreacted to low stimuli from the central banks, driving the Spanish risk premium up 58 basis points to 594.

In this sense, the results of Spain's next short- and long-term bond issues could determine whether Rajoy decides to ask for a bailout or skirt it once again. If he finally choses to seek EU aid, he knows that he can count on IMF backing. The institution has been known to examine cutback efforts, with good reason, before applying new stimulus measures.

The ECB's apparent passivity yesterday shouldn't change the fact that Spain has made a herculean effort to cut its national and regional government deficits. That said, the time between now and the treasury's next meeting in September should be used to set definite fiscal goals. It is critical, therefore, that during the next several weeks Andalusia, Catalonia, Asturias and the Canary Islands comprehend the importance of getting a bailout and do their part to demonstrate national cohesion. Draghi might have disappointed the markets yesterday, but Spain can't afford the same luxury.