Investors have reacted warily to comments by Spain’s prime minister that he will not accept certain conditions in return for a European Central Bank (ECB) proposal to buy Spanish government bonds.
In his first televised interview since being elected in November, Mariano Rajoy warned that there are “certain red lines” he will not cross if Spain asks for help from the eurozone’s bailout funds, which would trigger the bond buying under strict conditions.
He did not name the conditions, but said separately in the interview that he does not want to cut Spanish pension benefits because retired Spaniards with no way to supplement their monthly state payments would be hit harder than the rest of the country’s population.
Analysts warned that a drop in Spain’s borrowing rate since the ECB programme was announced last week might reverse if Mr Rajoy resists pressure to accept conditions that may be imposed in return for the bond buying.
“Given that Spanish borrowing costs have fallen substantially since the ECB announcement last week it would appear that Spain feels less pressure to acquiesce than it did this time last week, thus creating further potential for disappointment as politicians contrive to grab defeat from the jaws of victory,” said Michael Hewson, senior market analyst at CMC Markets.
The yield on Spain’s benchmark 10-year bonds was up 0.04% to 5.72% in trading. Despite the rise, the yield is markedly lower than when ECB announced its plan.
Rates of 7% or more are considered unsustainable, and prompted Greece, Ireland and Portugal to ask for bailouts of their public finances.
Spain has accepted a bailout of up to 100 billion euro (128 billion US dollars) to save its banking system, which was hit hard by a property boom gone bust. The country wants to avoid a full-blown bailout though.
Mr Rajoy was meeting Finland’s prime minister, Jyrki Katainen, in Madrid.
“Spain deserves to have lower interest rates after all they have done,” Mr Katainen said at a Madrid business forum, referring to economically painful austerity measures pushed through by Mr Rajoy this year that have raised taxes and cut government spending.
Spain is in a deep recession with unemployment of nearly 25%, the highest in the eurozone.