EU praise can’t hide Rajoy’s bailout jitters

Much was made of the apparent chemistry between Mariano Rajoy and Angela Merkel when the two leaders met in Madrid last week. The German Chancellor’s comment that she was “impressed with Spain’s reforms” was indeed music to the ears of the Spanish prime minister.

Similar praise from European Monetary Affairs Commissioner Olli Rehn over the weekend, along with IMF managing director Christine Lagarde’s statement that measures taken by Italy and Spain were “adequate in and of themselves” was also welcome from Rajoy’s point of view.

The Spanish leader is closely gauging these appraisals of his reform program because, as he almost certainly prepares to request some form of bailout from the EU, his biggest concern is the conditions attached to such a rescue.

While Spain’s borrowing costs have plummeted in recent days in the wake of Mario Draghi’s announcement that the European Central Bank is willing to buy up unlimited amounts of sovereign debt where necessary, a “soft bailout” employing such a mechanism is expected. And as Rehn said at the weekend, all Spain has to do is ask.

But with Rajoy’s approval rating taking a nosedive on the back of a severe austerity program that has seen him break his word several times, his credibility among ordinary Spaniards is on the line. An autumn of social discontent could turn even uglier if, for example, the bailout required him to tamper with pensions.

Praise from the likes of Rehn, Lagarde and Merkel in recent days makes a pensions reform look less likely, but on the other hand Draghi himself underlined the “strict conditions” attached to any bailout. Who do we believe? The answer depends heavily on how the Spanish economy performs in the coming weeks.

If, for example, this year’s attempts at reaching a deficit target of 6.3 percent of GDP, which is already looking rather ambitious, were to stray further, then the rescue package’s conditions would start to look more draconian. With many of the 17 Spanish regions visibly struggling to meet their own deficit targets, that’s increasingly possible.

Also, if more problems start to unfurl in the banking sector, suggesting that the reforms being taken are not enough, this could raise eyebrows in Brussels and Berlin.

Another factor the government is bearing in mind are October’s regional elections in Galicia and the Basque Country. Many suspect Rajoy will wait for those to take place before requesting a bailout, in a bid to improve his party’s chances of performing well. That would be a repeat of the mistake he made when he delayed the 2012 budget until after Andalusia’s March elections and confirmation that this government is putting party political concerns ahead of the national interest.