Spain Passes Market Test, Merkel Douses Summit Hopes
Spain showed on Thursday that it can still access the credit markets at an affordable but rising cost against a backdrop of feverish behind-the-scenes planning for a likely European rescue of its debt-stricken banks.
Madrid sold EUR2.1 billion (US$2.6 billion) of government bonds in a well-bid auction, paying just over 6 per cent to sell 10-year debt, up from 5.74 per cent last month. That laid to rest, at least for now, fears raised by Treasury Minister Cristobal Montoro on Tuesday that Spain was being shut out of the market.
Despite a rally in stocks, bonds and the euro due partly to expectations of action by central banks to revive flagging economic growth, the eurozone remains under pressure from investors and global partners to act decisively soon to resolve its festering debt crisis.
“There is a better environment over the last few days for Spanish bonds. Talk of a rescue for Spanish banks is the thing that is reducing risk aversion in the markets,” said Alessandro Giansanti, bond strategist with ING bank in Amsterdam.
France, the eurozone’s number two economy after Germany, continued to benefit from its safe-haven status, selling EUR7.84 billion of bonds at record low yields despite announcing a partial reversal of the previous government’s pension reform on Wednesday that runs counter to EU policies.
US President Barack Obama and Canadian and Japanese leaders telephoned Europe’s main leaders this week to express concern at the worsening crisis and press for stronger action.
German Chancellor Angela Merkel doused expectations that a June 28-29 European Union summit would produce a major breakthrough to a closer fiscal and banking union in the 17-nation currency bloc, saying progress would take longer.
In a television interview broadcast on Thursday, she said the euro area was moving inevitably towards a political union ceding more national sovereignty and that would lead to more of a two-speed Europe, with non-euro states in the slow lane.
“I don’t believe that there will be one single summit that will decide on a big bang,” Merkel told ARD. “But what we have been doing for some time, and on which a working plan will certainly be presented in June, is to say we need more Europe.”
“Whoever is in a currency union will have to move closer together. We have to be open to make it possible for everyone to participate. But we cannot stand still because some do not want to go with us,” she said.
As the EU’s main paymaster, Germany holds the key to how the bloc comes to Spain’s rescue, and whether Europe is able to agree on a banking union with a joint deposit guarantee and a bank resolution fund, as envisaged by the European Central Bank and the European Commission.
Merkel’s remarks highlighted a growing rift with non-euro member Britain, a longstanding brake on European integration, which said bluntly on Thursday that it would not take any part in a eurozone banking union.
Chancellor of the Exchequer (finance minister) George Osborne told BBC radio: “There is no way that Britain is going to be part of any euro zone banking union.
“I think Britain will require certain safeguards if there is a full-blown banking union.” His comments highlighted the potential complexity of EU negotiations on the issue, since London is the eurozone’s main financial centre.
Osborne urged the eurozone to use its bailout fund to recapitalise Spain’s troubled banks, which are reeling from bad debts left from the bursting of a property bubble, aggravated by a deep recession with massive unemployment.
Any significant move towards bank deposit insurance in the eurozone would require a change in the 27-nation European Union’s founding treaty, and hence Britain’s consent, he said.
Spain says it is awaiting the outcome of an International Monetary Fund report on its banking sector and an independent audit of its banks’ capital needs before deciding on any recourse to Europe to help recapitalise them.
The IMF report goes before the global lender’s board on Friday and will be issued on Monday, raising expectations that EU and Spanish officials may have the outlines of a possible rescue plan worked out when the numbers are released.
Spain has so far made no application for European aid, and officials say it is determined to avoid the kind of humiliating policy conditions and intrusive quarterly EU/IMF inspections imposed on Greece, Ireland and Portugal.
Among details that officials in Berlin and Brussels say are still unclear is whether Madrid would receive money from the temporary EFSF rescue fund or from the future permanent European Stability Mechanism, which has less rigid rules but only comes into force sometime in July.
The figure for possible aid is likely to depend on the IMF report, but may be higher than the IMF number because of deteriorating market conditions, sources familiar with the discussions said.
While a rescue loan may be presented for political reasons as going to Spain’s FROB bank resolution fund, legally European bodies can only lend to the state, EU officials say. That raises the question of what policy conditions and monitoring would be attached to any assistance.