The Spanish risk premium dropped 383 basis points yesterday to its lowest level since April, and the Ibex climbed back above 8,000 as markets responded to the likelihood of a "virtual bailout" for Spain.
All this good news will help the Treasury sell a round of bonds today. But the optimism reflects a general hope for doubts about Spain's future to clear up rather than reality, because the government is not going to ask for a bailout within the next several days. Right now, Merkel wants to wait things out, and she is the one with the key to allow the ECB to take action. It is true that there are signs of her position softening, because Germany cannot afford for the ratings agencies to lower Spain's credit status to junk-bond levels and has to act in a hurry to prevent that from happening.
That is to say, with a bailout like the ones utilized by Greece, Ireland and Portugal. Merkel favors opening a line of credit through the ECB. This is a cheap option for a bailout considering the incredible amount of funding that's necessary for Spain. Further, she wants to reach an agreement with Greece and convince Mario Monti that getting Rajoy to ask for a bailout can put an end to the sovereign debt crisis in Europe. While Merkel's approval hangs in the balance, we know that Rajoy doesn't want to ask for a bailout even though he has said that Spain is close to doing just that.
For this reason, the European Council, which begins today, will not discuss a Spanish bailout. Merkel wants to find solutions for Greece and Italy before allowing Spain to get ECB funding.
