Brussels, 04/09/2012 (Agence Europe) - Details will emerge over the next few days of coordinated intervention on the markets by the European Central Bank (ECB) and the eurozone bailout funds to bring down the cost of eurozone refinancing, with a highly awaited ECB meeting and an informal meeting of the Eurogroup in Nicosia on 14-15 September.
An official request to the eurozone bailout funds for aid would be the start of the process. Such a decision would have a high political cost for the government making it because this would amount to recognition that the country in question can no longer meet its financial commitments unaided. All eyes are on Spain at the moment, which is still having to pay interest rates on its long-term loans that are not affordable in the long-term. Spain wants to know whether the aid of up to €100 billion promised by the eurozone to recapitalise its struggling banks will be enough to reassure investors. At the end of September, a special audit will determine exactly how much cash Spanish banks will need (initially estimated at €64 billion) to achieve the new solvency requirements (9% of top quality capital).
Strings attached. Any country requesting aid would have to negotiate a structural adjustment programme with its lenders and this is something the Spanish prime minisiter, Mariano Rajoy, baulks at. Not ruling out the option of requesting aid if it's the right thing to do for Spain and the eurozone, Rajoy points out that Spain is already doing what its partners are requiring of it to balance the books and stimulate the economy and the country's refinancing problems are as much due to the problems of the eurozone as a whole as to specifically Spanish problems.
In terms of timing, the upcoming elections in the Spanish Basque Country and Galicia at the end of October makes it a bad time to request aid, although Madrid will have to roll over significant amounts of debt within the same timeframe and provide aid for its struggling autonomous regions. The French president, François Hollande, says that the 18-19 October European summit will provide an opportunity to take “structural” decisions to help the eurozone.
At the end of June 2012, the eurozone said that it would be possible to make “flexible” use of the EFSF/ESM bailout funds for member states that are respecting the country-specific recommendations and other commitments, including timelines, under the European semester system, the Stability and Growth Pact and the macroeconomic imbalances procedure (see EUROPE 10645).
The country-specific recommendations for Spain endorsed by the European summit cover: - public finance (reducing the public deficit to 3% in 2014 by implementing a financial stability law, reforming the pension system, taxation and the budget set-up); - the financial industry (reforming banks and housing and making it easier to obtain finance); - structural reforms (flexibility in network industries, boosting competition in services, reforming public services and backing innovation); - and the labour market (getting more people into work, education reforms and changing labour market intervention policy).
Spain is one of the 12 eurozone nations to have had their macroeconomic imbalances studied with a fine toothcomb. At the end of May 2012, the European Commission said Spain must tackle these very serious imbalances as a matter of urgency. The problems, it said, had been caused by high personal debt and problems with the financial industry following collapse of the property bubble.
It will only be a matter of days for Brussels to draw up the structural adjustment programme that will accompany any European aid package. The Stability Pact's budget and macroeconomic rules are already binding and the country-specific recommendations would be made binding and, for the first time, would be examined closely by the lenders of any country in receipt of EU aid.
Joint EFSF/ESM/ECB intervention. The European EFSF (European Financial Stability Facility) or the European Stability Mechanism (ESM) if it is given the go-ahead on 12 September by the German constitutional court, may decide to buy up the bonds of countries in receipt of aid. Meanwhile, the ECB would buy up bonds on the secondary markets to get round the ban laid down in the EU treaties on the bank providing aid to countries. At a private meeting on Monday of the European Parliament's economic and monetary affairs committee, the head of the ECB, Mario Draghi, hinted that the bank could buy sovereign debt maturing in two or three years' time. The aim of this measure would be to facilitate management of the ECB's monetary policy and Draghi said it would not be inflationary. On Thursday, the ECB is expected to giver further details about this bond buy-up (whether it will take place and if so, how it will operate).
Draghi faces tough resistance from Germany. The Bundesbank has not relented in its hostility to the ECB buying up sovereign debt because it feels that pressure must be put on struggling countries to get them to introduce reforms. Ignoring the fact that the ECB is meant to be independent, the German finance minister, Wolfgang Schäuble, argued on Thursday that public debt should not be financed by the ECB. (MB/transl.fl)