The reforms that the Spanish government has carried out during the past several weeks have for the most part satisfied euro group demands. Leaders discussed this news during a meeting held yesterday in Luxembourg in which finance ministers showed their joint support of the fiscal measures that Spain has taken after acknowledging that Spain will not have to ask for formal aid -- at least for now.
The European Commission came away from its meeting held yesterday in Luxembourg, during which finance ministers showed their collective support of Spain's fiscal reform measures after seeing that at least for now Spain doesn't have to ask for aid.
Their view aligns with the most recent statements made by Prime Minister Rajoy and Minister of the Economy Luis de Guindos, who have sought all means possible to avoid and would have devastating effects on their re-election campaigns. The key to understanding what the European finance ministers said lies in Merkel's attitude toward Spain. She?s trying to prolong the status quo and the deflated Spanish risk premium.
But we don't have to fool ourselves: Merkel's view also attempts to protect her political interests. The German chancellor does not want Spain to ask for a bailout, because before it gets one it will need backing from German parliament. That backing would not come easy.
All said, the relative calm in the markets right now could see a drastic change if Moody's decides to lower Spain's credit rating to junk-bond status at some point during the next several days. This decision would cause the risk premium to catapult above 600 basis points and force Spain to ask for a bailout that it doesn't want.
