No respite in sight as pressure on Spain intensifies


MARKET PRESSURE on Spain intensified, raising more questions over Europe’s rescue of its banks, as EU leaders awaited a new pro-bailout government in Greece and prepared for a modest easing of the rescue plan it must execute.

With no respite in sight from the debt crisis, Spain paid a hefty premium to sell short-term bonds in further sign of doubt over the banking rescue in that country.

At the G20 summit in Mexico, European leaders were urged by their global counterparts to finally settle the debt debacle.

French president François Hollande remarked in Los Cabos that US president Barack Obama “wants to understand what we’re going to do” about the crisis.

More talks between Mr Obama and European leaders were scheduled yesterday after a post-dinner meeting on Monday night was scrapped. German chancellor Angela Merkel said the dinner was “very intense” but suggested there was little more to discuss in any further talks that day.

The interest rate Madrid paid to sell one-year and 18-month debt was in excess of 5 per cent, more than two percentage points higher than one month ago.

The spike is significant because the banking bailout is predicated on Madrid retaining access to private markets for day-to-day borrowing. The present rates could force Madrid into a full-blown bailout, something which would overstretch Europe’s bailout funds.

The Spanish case looms large over a meeting tomorrow in Luxembourg of euro zone finance ministers. A European official heavily involved in preparations for these talks rejected suggestions the bailout plan has not worked and insisted there remained ample scope for it to work as “the Spaniards have not started”.

The official said “thousands” of people believe a direct European recapitalisation of Spain’s banks would be “desirable”, which Germany rejects. “Hundreds of people are saying it’s feasible, but it is not,” he said.

Without saying what specific concessions might be on offer to the incoming Greek government, the official laid ground for Athens to revise elements of its memorandum of understanding (MoU) with the EU-International Monetary Fund “troika”.

“Anybody who would say that we need not, and cannot renegotiate the MoU is delusional, because he, or she, would be under the understanding that the whole programme, the whole process, has remained completely on track ever since the weeks before the Greek first election,” the official said.

“Because the economic situation has changed, the situation of tax receipts has changed, the rhythm of implementation of the milestones has changed, the rhythm of privatisation has changed, if we were not to change the MoU, it does not work. We would be signing off on an illusion.”

Some euro zone countries are willing to relax some of the fiscal deadlines in the Greek plan, but other European sources say any further changes to the MoU may be merely “cosmetic” in scope.

The spokesman for economics commissioner Olli Rehn played down the prospect of any substantive revision. “We just decided on a second programme recently so nobody is talking about a new memorandum of understanding.”