Spain’s Aid Dilemma Takes Center Stage

Finance ministers want Spain to take more measures to cut debt.

European finance ministers squared off over a possible aid program for Spain, with creditors unwilling to commit until the government takes additional steps to boost competitiveness and rid the economy of debt.

Spain, already drawing on 100 billion euros ($130 billion) to repair its banking system, wants the lightest possible conditions on a European credit line or loan program that would also enable the European Central Bank to buy bonds to bring down its borrowing costs.

“If there will be support, there will be conditions,” Dutch Finance Minister Jan Kees de Jager told reporters before a meeting of euro-area finance chiefs in Nicosia, Cyprus today. “Spain is on the right way but they have to continue to convince the markets that they have a sound policy.”

Spain’s aid-or-no-aid dilemma comes with the euro at a four-month high and Spanish bond yields at five-month lows. As at prior stages in the almost three-year debt turmoil, political leaders run the risk of being lulled into a false sense of security that dilutes efforts to fix the economy.

“Europe is stabilized,” Austrian Finance Minister Maria Fekter said. “We’ll be equipped to deal with all phenomena that come along.”

The euro rose as much as 0.5 percent $1.3054 today, the highest since May 8. Spanish 10-year bond yields fell 5 basis points to 5.58 percent, the lowest since April 3. The extra yield over German bonds narrowed by 12 basis points to 396 basis points.

Financial markets were boosted by the ECB’s Sept. 6 offer -- with conditions attached -- to go on a bond-buying mission and a Sept. 12 ruling by the German supreme court that cleared the way for the setup of a 500 billion-euro permanent bailout fund.

Spanish Economy Minister Luis de Guindos continued to play for time, saying that a bond-buying program won’t be on the agenda today and pointing to “important announcements” on economic reforms to be made in Madrid “in coming days.”

Finance ministers are also in a holding pattern on Greece, the first victim of the crisis. Greek Prime Minister Antonis Samaras is facing hurdles within his coalition to proposed wage and pension cuts to meet creditor demands for 11.5 billion euros in budget savings.

Until then, the next installments of Greece’s 240 billion-euro aid package are on hold. Finance ministers today will hear a progress report from the “troika” of the European Commission, the ECB and the International Monetary Fund.

“We will today get informed about the interim situation,” German Finance Minister Wolfgang Schaeuble said. “When the troika report is ready we will discuss the necessary consequences and decide, but not now.”

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