September has revitalised the Euro and the financial markets. After ECB president Mario Draghi announced that the central bank would undertake an unlimited bond-buying plan for Monetary Union members in trouble, the German Constitutional Court also ruled in favour in the creation of the European Stability Mechanism (ESM). With the ESM set to assume the ECB's bond-buying role on a permanent basis, the short-term outlook for Europe looks more secure.
Indeed, the Euro has rebounded across many currency pairs, hitting fourth month highs in the EUR/USD pair. Perhaps more significantly, long-term bond yields for troubled nations such as Spain and Italy have dramatically decreased. It was only three months ago when Spain's ten year bond yield was at an eye-watering 7.6%. In the wake of the ECB announcement and ESM ruling, that yield had fallen a full 2 percent.
However, there is one key element of the ECB announcement that cannot be overlooked. Draghi said that the ECB stands ready to help nations, provided that they request an official bailout first. So far, neither Prime Minister Rajoy of Spain or Monti of Italy has been forthcoming. Spain is widely regarded as the biggest economic threat to the Eurozone, should things get worse in the nation. Rajoy's procrastination may not sit well with the European leaders or the market.
Rajoy's hesitance can be explained by the way that the market has reacted to September's news. Without having to say or ask for anything, Rajoy has seen his country's yields fall sharply. The market has already begun to price in the ECB's plan and has offered Spain a touch more breathing space. One would assume, however, that should Spain not act and ask for a bailout sooner rather than later, then the market could just as quickly turn against the troubled southern state.
Rajoy does not appear likely to act in the immediate future and that is most likely because of the impending regional elections. Spain has already seen some dramatic anti-austerity protests in its own efforts to reduce its debt. If Rajoy were to signal for a bailout, which would lead to foreign economists and experts examining the country and recommending what measures need to be implemented, it could make him extremely unpopular with the electorate.
A significant day on the calendar could be October 21, the day of the Galicia regional elections. Rajoy's People Party historically garners a lot of support from the region and Rajoy's own political hopes are likely to be defined over whether he can keep hold of this stronghold.
The People's Party has become increasingly more unpopular throughout the country in the wake of the national GDP shrinking 0.7% thus far in 2012 and unemployment reaching a painful 24.8%. Should the regional People's Party equivalent get through the election relatively unscathed, it may persuade Rajoy to take action and call for the bailout.
It very much seems to be a question of not 'if', but 'when' Spain will call for the bailout. The underlying questions that remain will be whether 'if' it is too late for the markets and, ultimately, 'if' the bailout will be enough.
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