“The next three months will be the path to the bailout,” Giansanti, an Amsterdam-based interest-rate analyst, said in a telephone interview on June 19.

The yield on Spanish 10-year debt was little changed basis points to 6.61 percent at 12 p.m. today in Madrid, pushing the risk premium over German bunds to 507 basis points. Italy's benchmark yield rose 6 basis points to 5.81 percent.

The Spanish-bank bailout made Italy the next potential investor target. Together, they could overwhelm the sums committed to safeguard the 17-nation currency bloc. Southern Europe's two major economies have 2.8 trillion euros of government debt, four times the total of Greece, Portugal and Ireland.

“A rescue for Italy is pretty much impossible without a major change in German borrowing costs, a major change in overall euro-zone levels of inflation, a major change in the level of the euro, or a major change in the structure of the euro zone,” Stuttard, Fidelity's head of international bond portfolio management in London, said in a telephone interview on June 19.

Bank Needs

Rajoy, 57, who was told by Germany's Angela Merkel at the G-20 in Mexico June 19 to spell out the depth of his banks' needs “as soon as possible,” will be under scrutiny today when he faces Merkel and French President Francois Hollande at a meeting in Rome hosted by Italy's Mario Monti.

The contrast between the unelected Monti, praised by global counterparts for his bid to bring order to Italy's finances, and Rajoy, who came to power just weeks later, is underscored in the bond markets.

When Rajoy took office in December, Italy's 10-year yields were surging above 7 percent and comparable Spanish debt traded as much as 200 basis points lower. Now, Spain's 10-year notes yield 81 basis points more than Italy's.

The International Monetary Fund June 8 urged Spain that devising an “effective communication” strategy is “critical” for financial stability.

“The Spanish problem was entirely avoidable,” said Thomas Mayer, a Frankfurt-based economic adviser to Deutsche Bank AG. “This has been created by miscommunication.”

The run-up to the bank bailout was marked by policy reversals and self-contradictions by Rajoy, who lost two general elections in Spain before ousting the governing Socialist Party in November.

Rajoy called for the euro region's rescue fund to recapitalize distressed lenders on May 28, even as he argued that Spanish lenders won't need external support. On June 2, he called on euro members to give up sovereignty over their budgets to cement a fiscal union, reversing his stance from three months earlier. That's when he said budgets were a sovereign matter as he defied deficit commitments to the European Union.

The following week, he left it to Economy Minister Luis de Guindos to explain the bank rescue. Eighteen hours later, with Spaniards posting criticism on Twitter with the hashtag #RajoyCobarde — Rajoy, coward — and El Pais newspaper accusing him of hiding, the premier spoke to the press.

Rescue Winners

“Yesterday, the credibility of the euro won, yesterday the future won,” he said on June 10. “Yesterday, the European Union won.”

Then, he announced that since the banks' funding problems were resolved he would continue with his plans to watch the national soccer team play that night and climbed aboard his government jet to fly to the Polish city of Gdansk.

“People were astonished that he was going off to Poland,” Jonathan Tepper, a partner at London-based investment research firm Variant Perception, said in a telephone interview. “Things like that make him look completely incompetent.”

A spokeswoman for Rajoy who asked not to be named said the premier wanted to be clear the June 9 agreement was not a bailout for the sovereign and he wasn't denying reality. Spain has not been dragging its feet over the aid request since the official position has been that they would wait for yesterday's stress-test results to decide how much capital would be required, she added.

Spanish 10-year government bond yields rose as much as 76 basis points in the week that followed, the biggest weekly gain since 1997 and commentators and rival politicians mocked Rajoy for refusing to acknowledge that the loan deal was a bailout.

“Say it with me, it's – a – res – cue,” Rosa Diez, leader of a minority group, taunted the prime minister in parliament. “Nothing bad's going to happen if you say it.”

Rajoy's budget cutting faces virtually no reduction in the 350-member parliament, where his People's Party has 185 seats.

Still, his standing with the public has taken a beating. A poll conducted for El Mundo by Sigma Dos between June 12 and June 14 showed Rajoy's disapproval rating doubled to 43 percent from January.

In Mexico, World Bank President Robert Zoellick said it wasn't all Rajoy's fault, criticizing Europe's leaders for fumbling the bailout.

“To have that being a negative story is amazing” given the amount of money pledged, Zoellick told a June 17 panel discussion at the meeting in the Mexican resort of Los Cabos. “The execution was extremely poor.”

Bloomberg News

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