Despite Berlin's opposition to the proposal, concerns about Spain may force a change of mindset, writes ARTHUR BEESLEYin Brussels
THE WORSENING financial crisis in Spain has led the European Commission to raise the prospect of the European Stability Mechanism (ESM) bailout fund directly rescuing banks. Any such move would create a precedent for Ireland. It remains the case, however, that it is easier to propose something than to execute it.
Germany remains opposed to this notion, and the history of Europe’s debt emergency shows that fellow creditor countries such as the Netherlands, Finland and Austria tend to line up behind Berlin in matters like this.
Still, it is a fair measure of the acute tension in the euro zone right now that commission president José Manuel Barroso sees fit to publicly advocate the creation of a “banking union”. This is still cast as a long-term initiative but there is no doubting the extent of the concern over the situation in Madrid.
Although its finances are racked by rampant unemployment, spendthrift autonomous regions and a rapidly growing banking crisis, Spain continues to insist it will not need an EU-IMF bailout. Few serious observers believe it can hold out indefinitely. As external auditors carry out an intensive examination of its wayward banks, concern mounts daily that Spanish prime minister Mariano Rajoy will not be able to foot the rescue bill.
Spain’s borrowing costs are skirting new records this week as the country struggles to find €19 billion to prop up the stricken Bankia group of savings banks.
The fear is that this is only the beginning and that the government simply won’t have the cash or debt-raising capacity to do the deed. Hence growing talk of an international bailout – and consequent pressure on Italy, whose borrowing costs are also rising.
The snag this presents is that Spain, Europe’s fourth largest economy, might overwhelm the EU’s bailout funds if it is taken out of bond markets fully. This would be doubly so – most likely – if the rot spread to Italy. Add into the equation the febrile electoral scene in Greece and it is clear that the euro zone is approaching yet another pivotal moment.
What to do? To lessen the load on Spain and make it easier for it raise money for regular expenditure, attention is increasingly centred on giving the ESM fund the power to rescue banks directly, with the money deployed not going onto the national debt. Rajoy wants this badly, newly elected French president François Hollande has backed him up and Taoiseach Enda Kenny readily declares his interest in any such departure.
Although Dublin still insists it is ardently attached to its campaign to refinance the Anglo Irish Bank promissory note scheme, it is fair to conclude that talk of new ESM powers is more frequent these days than any reference to the dreaded Anglo IOUs.
This has potential to be a game changer for the Irish rescue. In the commission’s own language, it would break the link between banks and the sovereign state. But we are still in the realm of proposal-making. This is embryonic in political real-time – and most of the other radical solutions proposed to tame the crisis ran into a German brick wall.
It would mark a huge political departure for any EU bailout fund to assume the burden of member states’ banking debt. If underwriting the sovereign liabilities of other people has proved contentious for the AAA countries, doing the same for bust banks would prove no less so.
Still, the ease with which top European officials discuss this idea points to considerable technical work in the background. That is not to say Berlin is ready to budge. Far from it, it seems, although German chancellor Angela Merkel tends not to move until the very last moment.
EU economics commissioner Olli Rehn, when asked about the possibility of ESM aid for Spain’s banks, said “direct disbursements to banks are not foreseen in the treaty” that underpins its work. It follows that the ESM treaty would have to be changed, but this is a treaty which has yet to be enacted by most member states.
More than that, however, there would have to be a fundamental change of mindset in relation to banking debts. As Europe surveys the wreckage of Spain’s bombed-out lenders, that time might soon be upon us.