EU authorities are working behind the scenes to pave the way for a new Spanish rescue program and unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform program that will be unveiled next week.
According to officials involved in the discussions, talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue program, ensuring they are in place before a bailout is formally requested.
One senior European official said negotiations have been conducted directly with Luis de Guindos, the Spanish finance minister. The plan, due to be unveiled next Thursday, will focus on structural reforms to the Spanish economy long requested by Brussels, rather than new taxes and spending cuts.
“It is a kind of ‘proto-program,’ if such were needed,” the official said. The commission could, however, still request more austerity measures next month to meet existing EU budget targets, which Madrid is expected to miss.
Pre-approval by Brussels for Thursday’s announcement is intended to ease the political quandary facing Mariano Rajoy, the Spanish prime minister. Mr Rajoy is reluctant to ask the eurozone’s 500 billion euro rescue fund, the European Stability Mechanism, to begin purchases of Spanish sovereign bonds because he fears that EU monitors would demand tough conditions in return.
Pressure on Rajoy mounted after Mario Draghi, European Central Bankpresident, announced this month that the central bank’s new bond-buying program would only be triggered after governments request help from the ESM and agree to reform plans with eurozone lenders. Bond buying by both the ESM and ECB would lower Spanish borrowing costs, easing Madrid’s debt burden.
Spanish officials have for months attempted to secure EU assistance without significant strings attached, but have made little headway in face of demands from a German-led group of northern countries, as well as the Bundesbank, that any new rescue program include firm timetables and tight monitoring regimes.
Pressure is expected to increase again next Friday, when the Spanish government is due to announce results of a three-month review of its financial system. The review includes how much ESM money will be needed to recapitalize the Spanish savings banks, or cajas, which were particularly hard hit by a burst housing bubble. The EU has already pledged as much as 100 billion euros to help recapitalize the country’s teetering banks.
In the latest sign Spain is still trying to avoid a formal request for more aid, Spanish officials this week began discussing whether they could use some of the bank rescue funds to buy Spanish sovereign debt – essentially getting bailout money through the back door.
Simon O’Connor, the European Commission’s economic spokesman, said Spain would not be allowed to redirect the aid money, while another senior eurozone official said Madrid was “freelancing.”
However, the official said Madrid’s request could not be completely dismissed. Using cash leftover from the bank bailout to buy sovereign debt would not require approval from the legislatures of Spain’s European partners – something of particular concern in Berlin, where the government has urged Madrid not to request further aid so it can avoid a confrontation with a reluctant Bundestag.
“[I] would not totally exclude that it gains traction over time,” the official said. “It does not involve new money to be politically agreed on.”