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Opposition Wanes to Spanish Aid Request

By Peter Spiegel in Brussels, Guy Dinmore in Rome and Quentin Peel in Berlin, Financial Times
Wednesday, 17 Oct 2012 | 2:43 AM ET

Opposition to a Spanish request for a second round of EU aid has begun to wither in recent days both in Madrid and other eurozone capitals, clearing the way for the first use of a new, limitless European Central Bank bond buying program.

Philippe Huguen

Under the outlines of the plan being discussed, Spain would request a precautionary credit line from the eurozone's new €500bn rescue fund, the European Stability Mechanism, which could be used to purchase Spanish bonds at auction in an emergency.

Because the aid would only be a credit line and not immediate payments to Madrid, the scheme is expected to face less political opposition in northern creditor countries.

Mario Draghi, the ECB chief, specifically outlined the possibility of triggering ECB bond buying if an "enhanced conditions credit line" was requested from the ESM when he unveiled his program last month.

A senior EU official said momentum has increased as resistance to the plan has fallen off in Germany, which has for weeks urged Madrid not to make the request. The official cautioned a formal application could still be weeks away.

"They are moving to a request, yet it may not happen today or tomorrow or this week," said the official. "Germany's moving and the timeline will depend on the Greek saga."

The official said the move is now likely to be finalized in November. Talks between international lenders and Greek ministers broke off again on Tuesday amid continuing acrimony.

Although Wolfgang Schäuble, the German finance minister, has publicly argued that Spain does not need more assistance and is taking the reform measures and spending cuts necessary, there were indications from senior members of the Bundestag on Tuesday that Germany is preparing for a Spanish request.

German officials do not expect the request until after Spanish regional elections in Galicia, scheduled for October 21.

Eleventh-hour concerns have arisen over the request's impact on Italy, with some senior officials concerned that a Spanish request, while temporarily placating eurozone debt markets, will only shift the focus onto Rome, which has much higher debt levels.

Still, Mario Monti, Italy's technocratic prime minister, has in recent days publicly backed Spanish aid, saying it would increase confidence in the new ECB-backed rescue system.

"There are two lines of thought," Mr Monti told reporters on Friday. "One says that speculators will, like a pack of wolves, move on other countries. But if the system is there and it works, I imagine that this would make market speculation less aggressive."

A senior Italian official said his government believed Spain should submit its request soon and that this would "complete the decoupling" of Italy and Spain in the perception of the market.

One senior Spanish finance ministry official predicted the country's stock market and government debt would surge after a request.

"The [Spanish] risk premium would fall by 100 to 150 basis points, and the Ibex [Spanish stock index] would rise by 15 per cent," the official said.

Nonetheless there is also the sense in government circles that other countries, particularly Germany, want to "bundle" Spain with Italy in a joint request for aid that would be easier to pass through their respective parliaments rather than repeated requests for approval.

German officials denied they are seeking requests from both countries together, or a bundling of the Greek and Spanish programs along with other bailout requests, including Cyprus.

"We don't think it would work," said one German official. "We cannot arrange life so naturally that they can all come tied in a bundle of decisions."

As Vittorio Grilli, Italy's finance minister, reiterated this week, Rome remains adamant that it does not need ECB intervention given its stronger fiscal situation in running a primary budget surplus, meaning it is taking in more money than it is spending before interest payments.

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