Looks like Rajoy chickened out in the end, just like he did before with the fight of the deficit numbers for 2012 (anyone still care when it is supposed to be 5.3 or 5.8%? hahaha).
The ECB said yesterday that the Spain’s plan to directly inject debt into BFA-Bankia was unacceptable and amounted to monetization. Instead, the ECB demanded that the Spanish government raise the money required on the bond market.
The stupidity of the whole exercise is that this is purely a question of appearances. Suppose the Spanish government goes and sells 19 billion in debt on the market, then injects the cash raised by this into BFA. So what’s stopping BFA from buying 19 billion euros of Spanish government debt with this cash? Since the government effectively owns 100% of BFA, it doesn’t matter how many contortions it goes through to funnel cash into BFA, because at the end of the day it is just borrowing money from itself.
The only other alternative would be for BFA to raise the money from “the markets”, but that obviously won’t work since BFA is worth a (very large) negative amount of money. The classic way of getting around this would be for the government to sell BFA to a private entity for 1 euro, along with a guarantee covering the negative amount (this is what they did with CAM earlier this year). Good luck finding any private entity left in Spain that could make that kind of investment.