If the interest that Spain is paying on its debt stays in the 7% range, financing the debt will quickly become unsustainable. This is the scenario that Rajoy proposed yesterday in the European summit. Spain is facing a bailout, but there could be significant differences the type of bailout and what policies go along with it.
Germany could approve a soft bailout, meaning the EU/IMF/ECB troika won't intervene directly, but will have some control. All the EU's proposed reforms would be imposed on Spain: higher VAT, thriftier government payrolls and salaries, lower pensions and more labor reforms. It's possible that Merkel could offer Rajoy the soft bailout option as a way of solving Spain's economic problems and keeping current policies intact.
The result of bailouts in Greece, Ireland and Portugal, as we have seen, increased doubts about the EU's future, turned political parties against each other and modified power structures while increasing the danger of extremist uprisings.
The technocrat governments' proposal isn't an ideal solution. But for Spain, a soft bailout could be an interesting choice. No matter what, the government is going to make some important announcement during the next several weeks (i.e., the tough measures that Rajoy referred to last Monday in front of a CEOE assembly), because time is running short for Montoro to meet the country's deficit goal.
That goal will be tough to meet. In May the imbalance had already reached 3.4% of the GDP, and the limit for 2012 is 3.5%. Spain's economic situation is in danger, which justifies the even stricter cutbacks that the government will pass in July.
