Europe Moves to Contain Spanish Trouble as Finance Chiefs Meet

| October 8, 2012 | 0 Comments

European officials will move to
prevent Spain from dragging the single currency into a new round
of convulsions this week as a series of high-level meetings aim
to ease the three-year-old European debt crisis.

European finance ministers meet in Luxembourg today to
discuss Spain’s overhaul effort and closer banking cooperation,
while on Oct. 10, Spanish Prime Minister Mariano Rajoy travels
for talks with French President Francois Hollande in Paris.
Germany’s Chancellor Angela Merkel tomorrow makes her first
visit to Greece since the crisis began in 2009.

“It feels as if we are in for a month or so of Spanish
trouble,” Erik Nielsen, London-based chief global economist at
UniCredit SpA (UCG), wrote in a note yesterday. Nielsen cited the risk
that Spain will wait too long to request financial assistance
and that a rescue package will be badly designed.

A month after European Central Bank President Mario Draghi
unveiled a plan to gain the upper hand through central-bank bond
purchases, handing the burden of crisis resolution over to
European governments, leaders have yet to agree on a blueprint
for rescue conditions and centralized bank supervision.

Finance ministers from the 17-member euro area will discuss
issues including Spain at 5 p.m. in Luxembourg; ministers from
all 27 nations in the European Union will meet the next day. EU
leaders gather for a summit in Brussels the following week on
Oct. 18-19.

Bonds Gain

Spain’s two-year notes advanced for the first time in four
weeks last week as speculation about an assistance request
intensified and as Draghi reiterated the ECB’s bond-buying
program is ready to be deployed. Spanish 10-year yields slid 25
basis points to 5.69 percent last week, as the single currency
posted a weekly gain of 1.4 percent to trade at $1.3045.

European officials who expressed optimism at the ECB’s
summer plan to fix the crisis have grown uneasy at Spain’s
hesitation to set it in motion by requesting aid, a condition
that Draghi insists on. Spain’s Rajoy has said his government is
considering a request, while damping speculation that it will
come soon. Spain has local elections this month and next.

Deputy Prime Minister Soraya Saenz de Santamaria said Oct.
5 that the country had refrained from seeking aid because of
concern about how, and even whether, a program would work.

“We need to have all the elements on the table and also
the certainty that it would materialize” before making a
bailout request, Saenz told reporters in Madrid.

Purchase Plan

With the Spanish leader’s 2013 budget relying on a more
optimistic economic outlook than that of most economists, Rajoy
may say more about his strategy in Paris after finance ministers
have wrapped up talks.

Draghi, who on Sept. 6 fleshed out his pledge to do
whatever is necessary to save the euro over the objections by
Germany’s Bundesbank, told reporters in Slovenia on Oct. 4 that
the next step depends on the decisions of governments.

“Today we are ready with our OMT,” Draghi said in the
Slovene capital Ljubljana, referring to the ECB’s open-ended
purchase program, known as Outright Monetary Transactions. “Now
it’s really in the hands of governments.”

Economic change is needed in almost all euro area states
including France and Germany, ECB Executive Board Member Joerg Asmussen said in an interview with Bild am Sonntag published
yesterday. Asmussen said he wouldn’t agree to bond purchases
without conditionality and “many of my colleagues see things
that way.”

Bailout Funds

While policy makers must fill in the details, countries
seeking aid need to go through the euro-area bailout funds,
which will require conditions such as cutting spending and
closing budget gaps. Funds such as the permanent European
Stability Mechanism would then buy bonds alongside the ECB.

“It seems increasingly clear that Spain will request a
program from the ESM only once its funding costs have moved
considerably higher,” UniCredit’s Nielsen wrote. “Once we get
a program, I worry that the ESM support comes in the wrong form,
potentially preventing the desired effects on markets.”

Another conflict is centralized supervision over European
banks, a precondition from a June EU summit that would allow
bailout funds to recapitalize banks directly, potentially
breaking the link between banking and sovereign debt.

German Finance Minister Wolfgang Schaeuble has led
criticism of the plan, saying that it’s moving too quickly and
that bailout funding shouldn’t cover “legacy” debt accrued
before establishing a supervisor. Ministers must also agree on
the involvement of European banks outside the 17-member euro.

Merkel Visit

The second day of the Luxembourg meeting will be
overshadowed by Merkel’s first trip to Athens since July 2007.
The visit underscores her shift toward keeping Greece in the
euro area and silencing the debate over a potential exit.

“This is the strongest indication yet that Greece is not
about to be forced out of the eurozone any time soon,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London,
wrote in an e-mailed statement on Oct. 5.

Merkel’s visit will be accompanied by public protests among
Greeks, including a walkout called by unions, who see the German
leader as the face of austerity measures. The chancellor has
been depicted by protesters and some Greek media wearing
jackboots and an SS uniform.

The visit coincides with deliberations among Greece’s
troika of international creditors — the ECB, the European
Commission and the International Monetary Fund — on whether the
country will receive its next installment of aid. ECB Executive
Board member Joerg Asmussen said on Sept. 29 that Greece may
need more outside aid, the most recent representative of the
troika to call for more help.

Greek Progress

The finance ministers may issue a statement lauding
Greece’s progress in delivering austerity measures, EU
Commissioner for Economic and Monetary Affairs Olli Rehn said.

“It’s important that this can be concluded in the coming
weeks,” Rehn said in an interview in Helsinki Oct. 6.
“Negotiations have progressed well in the past few days and
last night. This is why I assume and expect the euro-group to
give a positive and supportive statement on Greece’s progress.”

To contact the reporter on this story:
Patrick Donahue in Berlin at
pdonahue1@bloomberg.net

To contact the editor responsible for this story:
James Hertling at
jhertling@bloomberg.net


Enlarge image
Spanish Prime Minister Mariano Rajoy

Spanish Prime Minister Mariano Rajoy

Spanish Prime Minister Mariano Rajoy

Angel Navarrete/Bloomberg

Mariano Rajoy, Spain’s prime minister.

Mariano Rajoy, Spain’s prime minister. Photographer: Angel Navarrete/Bloomberg


Enlarge image
Greek Prime Minister Antonis Samaras

Greek Prime Minister Antonis Samaras

Greek Prime Minister Antonis Samaras

Chris Ratcliffe/Bloomberg

Greek Prime Minister Antonis Samaras has said his two-year package of spending cuts contains unfair and painful decisions that are necessary to restore credibility and keep the country in the euro area.

Greek Prime Minister Antonis Samaras has said his two-year package of spending cuts contains unfair and painful decisions that are necessary to restore credibility and keep the country in the euro area. Photographer: Chris Ratcliffe/Bloomberg


Enlarge image
Europe Moves to Contain Spanish Trouble as Finance Chiefs Meet

Europe Moves to Contain Spanish Trouble as Finance Chiefs Meet

Europe Moves to Contain Spanish Trouble as Finance Chiefs Meet

Angel Navarrete/Bloomberg

Demonstrator hold signs against social cuts during a protest organized by Spanish trade unions against unemployment in Madrid, Spain, on Sunday.

Demonstrator hold signs against social cuts during a protest organized by Spanish trade unions against unemployment in Madrid, Spain, on Sunday. Photographer: Angel Navarrete/Bloomberg


Enlarge image
Europe Moves to Contain Spanish Trouble as Finance Chiefs Meet

Europe Moves to Contain Spanish Trouble as Finance Chiefs Meet

Europe Moves to Contain Spanish Trouble as Finance Chiefs Meet

Angel Navarrete/Bloomberg

A demonstrator holds a sign against social cuts during a protest organized by Spanish trade unions against unemployment in Madrid, Spain, on Sunday.

A demonstrator holds a sign against social cuts during a protest organized by Spanish trade unions against unemployment in Madrid, Spain, on Sunday. Photographer: Angel Navarrete/Bloomberg

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