Speculation grows about full bailout of Spain by EU and IMF

Sat, Jul 28, 2012, 01:00

SPECULATION WAS growing last night that Spain is positioning itself for a full EU-IMF bailout worth €300 billion, with signals to that effect from Madrid and conflicting messages from Berlin and Paris.

Ahead of such a move, French daily Le Monde reported that the European Central Bank and euro zone governments are preparing a market intervention to drive down Madrid’s borrowing costs.

German chancellor Angela Merkel and French president François Hollande called on “EU member states – as well as the European institutions to live up to their obligations in their own area of competence”.

After a phone conversation the two leaders, in a statement, said they were “determined to do everything to protect the euro zone”.

Their remarks were widely seen as a signal to ECB president Mario Draghi, whose similar remarks a day earlier fuelled speculation that Europe is planning a two-pronged approach of bond-buying now and bailout later should Spain’s borrowing costs remain at levels considered unsustainable.

Le Monde, citing unnamed sources, said the ECB was willing to take part in a bond action on condition governments agreed to use the bloc’s bailout funds, the European Financial Stability Facility and European Stability Mechanism.

Under the plan, the temporary EFSF could be activated first to purchase Spanish and Italian debt on the primary market, followed by the ESM in September, once it becomes operational.

The ECB would, simultaneously, buy Spanish and Italian government bonds itself on the secondary market, according to the report.

Madrid is already thinking beyond bond-buying. Spain’s economy minister, Luis de Guindos, reportedly told his German counterpart Wolfgang Schauble in Berlin earlier this week that he could envisage applying for a bailout on top of the €100 billion already agreed to support the country’s ailing banks.

Mr Schauble was cautious, according to Spanish officials, aware that such a bailout of up to €300 billion would stretch the EFSF beyond breaking point.

German officials denied Le Monde’s reports yesterday that a bond-buying plan was looming. However, a senior Berlin source said a bailout could not be ruled out when the ESM is activated.

“For a step like this an application would have to be filed and we are aware of no such application at present,” said one German official.

Yesterday, Mr Schauble welcomed Mr Draghi’s remarks — as an indication not of a looming ECB intervention on markets but of the need to continue the “necessary measures to master the crisis of finance and of trust”.

“In primary place are the reform efforts of member states themselves,” he said.

“Ireland was able to place long-term (debt) papers for the first time. That shows the fruits of the adjustment programme in the winning-back of market trust.”

The Merkel-Hollande statement was similarly conditional: following the promise to do everything needed came a disclaimer that leaders had to first implement last month’s summit conclusions.

Leaders agreed at their June 28th-29th meeting to work towards a €500 billion bailout fund to recapitalise ailing banks directly, without adding to the national debt of struggling countries. This can happen, Berlin insists, only when a European banking regulator is up and running effectively – by year-end at the earliest.

Aware of German reticence, French finance minister Pierre Moscovici predicted yesterday that the ECB would act to ease the rising borrowing costs of Spain and Italy.

“I trust Mr Draghi to do exactly what is needed, that is to act so that markets are appeased and there can be a relaxation of the interest rates for Spain and Italy,” said Mr Moscovici, long a vocal advocate of aggressive ECB intervention on bond markets.

Borrowing costs for Spain and Italy dropped after Mr Draghi said the ECB was ready to do whatever it took to save the euro, including acting to lower borrowing costs.

That set alarm bells ringing in Germany where, as elsewhere, analysts interpreted his remarks as an opening gambit for bond-buying.

In Frankfurt a Bundesbank official insisted yesterday there had been “no change” in the ECB position – bond-buying is highly unpopular in Germany and contributed towards the resignation of Berlin’s top two men in the ECB.

Speculation of a new bond-buying wave yesterday prompted an almost uniformly hostile reaction in the German media yesterday, Die Welt dubbing the Draghi ECB a “Trojan horse . . . that no longer stands for stability and principles”.