Both the European Commission and the Spanish government know some of the bailout conditions that the EU will place on Spain. The conditions were set in Spring, and many of them have already been put in place.
Spain?s third financial reform just passed, and the country?s VAT increase just went into effect as well. There are still some guidelines that have not been implemented and, for this reason, two European commissioners (Rehn and Almunia) said yesterday that Spain will not have to ask for additional conditions. The actions still pending relate to two critical issues that give rise to big social pushback: eliminating the temporary in the pension reform period and cutting the number of months that people can earn unemployment benefits.
The first issue implies pushing the retirement age to 67 years in 14 years from now, keeping in mind the expectation that the legal retirement age will change and the calculation period that determine when people receive pensions. They are tough measures, next to more unemployment benefit cutbacks, that the Spanish government prefers not to mention for reasons of political expediency because two elections are on the horizon. But also because the government needs to assure that EU member agree on exactly what Spain will receive in bailout funding and how the amount and conditions will affect the risk premium.
It?s not the same to ask for this sacrifice so that the risk premium stabilizes at 400 and not 200 basis points. The tug-of-war between Spain and Germany continues, and it?s likely that Spain will delay asking for a recovery as long as possible, taking advantage of the liquidity margin that Draghi?s recent statements have provided.
The issue is that so long as Spain?s economy continues to falter, we run the risk of returning to a period of instability.
