European officials will move to prevent Spain from triggering a new round of convulsions as policy makers begin preparing for a summit next week aimed at easing the region’s three-year-old debt crisis.
European finance ministers meet in Luxembourg today to discuss Spain’s overhaul effort and closer banking cooperation. With European Union deficit enforcer Olli Rehn also saying the ministers may issue a statement lauding Greece on its budget measures, German Chancellor Angela Merkel tomorrow makes her first visit to the country since the turmoil began in 2009.
“It feels as if we are in for a month or so of Spanish trouble,” Erik Nielsen, London-based chief global economist at UniCredit SpA, wrote in a note yesterday. Nielsen cited the risk that Spain will wait too long to request financial assistance and that a rescue package will be badly designed.
A month after European Central Bank President Mario Draghi unveiled a plan to gain the upper hand through central-bank bond purchases, handing the burden of crisis resolution over to European governments, leaders have yet to agree on a blueprint for rescue conditions and centralized bank supervision.
Finance ministers from the 17-member euro area will discuss issues including Spain at 5 p.m. in Luxembourg; ministers from all 27 EU nations will meet the next day. EU leaders gather for a summit in Brussels next week on Oct. 18-19.
Stocks and the euro fell before today’s meeting, with the Euro Stoxx 50 down 1.1 percent at 9:59 a.m. in London and the euro down 0.6 percent to $1.2971 in Frankfurt. Spanish 10-year bond rose, with the yield falling 6 basis point to 5.59 percent, extending last week’s gain as Draghi reiterated the ECB’s bond-buying program is ready to be deployed.
European officials who expressed optimism at the ECB’s summer plan to fix the crisis have nevertheless grown uneasy at Spain’s hesitation to set it in motion by requesting aid, a condition that Draghi insists on. Spanish Prime Minister Mariano Rajoy has said his government is considering a request, while damping speculation that it will come soon.
Rajoy travels for talks with French President Francois Hollande in Paris on Oct. 10.
Deputy Prime Minister Soraya Saenz de Santamaria said Oct. 5 that the country had refrained from seeking aid because of concern about how, and even whether, a program would work.
“We need to have all the elements on the table and also the certainty that it would materialize” before making a bailout request, Saenz told reporters in Madrid.
With the Spanish leader’s 2013 budget relying on a more optimistic economic outlook than that of most economists, Rajoy may say more about his strategy in Paris after finance ministers have wrapped up talks.
Draghi, who on Sept. 6 fleshed out his pledge to do whatever is necessary to save the euro over the objections by Germany’s Bundesbank, told reporters in Slovenia on Oct. 4 that the next step depends on the decisions of governments.
“Today we are ready with our OMT,” Draghi said in the Slovene capital Ljubljana, referring to the ECB’s open-ended purchase program, known as Outright Monetary Transactions. “Now it’s really in the hands of governments.”
Economic change is needed in almost all euro area states including France and Germany, ECB Executive Board Member Joerg Asmussen said in an interview with Bild am Sonntag published yesterday. Asmussen said he wouldn’t agree to bond purchases without conditionality and “many of my colleagues see things that way.”
While policy makers must fill in the details, countries seeking aid need to go through the euro-area bailout funds, which will require conditions such as cutting spending and closing budget gaps. Funds such as the permanent European Stability Mechanism would then buy bonds alongside the ECB.
“It seems increasingly clear that Spain will request a program from the ESM only once its funding costs have moved considerably higher,” UniCredit’s Nielsen wrote. “Once we get a program, I worry that the ESM support comes in the wrong form, potentially preventing the desired effects on markets.”
Another conflict is centralized supervision over European banks, a precondition from a June EU summit that would allow bailout funds to recapitalize banks directly, potentially breaking the link between banking and sovereign debt.
German Finance Minister Wolfgang Schaeuble has led criticism of the plan, saying that it’s moving too quickly and that bailout funding shouldn’t cover “legacy” debt accrued before establishing a supervisor. Ministers must also agree on the involvement of European banks outside the 17-member euro.
The second day of the Luxembourg meeting will be overshadowed by Merkel’s first trip to Athens since July 2007. The visit underscores her shift toward keeping Greece in the euro area and silencing the debate over a potential exit.
“This is the strongest indication yet that Greece is not about to be forced out of the eurozone any time soon,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, wrote in an e-mailed statement on Oct. 5.
Merkel’s visit will be accompanied by public protests among Greeks, including a walkout called by unions, who see the German leader as the face of austerity measures. The chancellor has been depicted by protesters and some Greek media wearing jackboots and an SS uniform.
The visit coincides with deliberations among Greece’s troika of international creditors -- the ECB, the European Commission and the International Monetary Fund -- on whether the country will receive its next installment of aid. ECB Executive Board member Joerg Asmussen said on Sept. 29 that Greece may need more outside aid, the most recent representative of the troika to call for more help.
“It’s important that this can be concluded in the coming weeks,” Rehn, the EU Commissioner for Economic and Monetary Affairs, said in an interview in Helsinki Oct. 6. “Negotiations have progressed well in the past few days and last night. This is why I assume and expect the euro-group to give a positive and supportive statement on Greece’s progress.”