Brinkmanship as Spain warns over bail-out terms
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Spain has issued a veiled warning that it will not accept a full bail-out from Europe if the terms are too harsh, a move that would paralyse the European Central Bank and call the euro’s survival into question.
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By Ambrose Evans-Pritchard
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9:14PM BST 04 Sep 2012
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Mr de Guindos said the crisis
engulfing the region is larger than any one country and warned north Europe not
to scapegoat Spain. Photo:
AP
In an escalating game of brinkmanship, Spanish finance minister Luis de Guindos said his country is not yet willing to sign a Memorandum giving up fiscal sovereignty to EU inspectors. “First of all, one must clarify the conditions,” he told German newspaper Handelsblatt.
Mr de Guindos said the crisis engulfing the region is larger than any one
country and warned north Europe not to scapegoat Spain.
“My colleagues are aware that the battle for the euro will be fought in
Spain. Spain is right now the breakwater for the eurozone,” he said, adding that
“solidarity” would be well-advised.
The warning comes as German Chancellor Angela Merkel leaves for Madrid for
talks with premier Mariano Rajoy to thrash out the conditions of a full
sovereign rescue of up €300bn (£238bn), beyond the €100bn bank rescue already
agreed.
The ECB’s executive board met today to prepare crisis proposals for the
governing council’s meeting on Thursday, including a “yield band” to lower
borrowing costs for Spain and Italy.
The ECB has tied its hands under an implicit deal with Germany, announcing
that it cannot proceed until Spain and Italy request help from the eurozone’s
bail-out funds and submit to tough conditions.
Germany now seems fully behind the bond plan of ECB chief Mario Draghi. Jorg Asmussen, Germany’s ECB board member, said today that bond purchases are necessary to save the euro and, therefore, within the bank’s mandate.
“The risk premia of sovereign bonds now reflect not just the insolvency risk of some countries but an exchange rate risk, which should not theoretically exist in a currency union. The markets are pricing in a break-up of the eurozone. Such systemic doubts are not acceptable,” he said.
Two-year bold yields in Spain plummeted by 44 basis points to 2.94pc and Italy’s fell to 2.29pc after Mr Draghi told MEPs that purchases may target debt of up to three years, longer than assumed.
Jacques Cailloux from Nomura says investors should be wary of the political minefield ahead. “We expect Spain and Italy to resist calling for help, promoting renewed market deterioration,” he said.
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There is little doubt that Spain will need a rescue as it struggles to raise €40bn over the next two months. The country’s finances are unravelling on every front, with internal rescues for Catalonia, Valencia, Murcia, and Andalucia fast depleting the €18bn fund set aside for the regions.
It emerged today that Spain’s social security system has raided a rainy-day fund to cover state pensions for the first time as deepening recession erodes contributions.
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Tomas Burgos, social security minister, said the government had drained €4.4bn from the Fondo de Prevencion – financed from workers’ illness insurance – to meet the shortfall in July, reducing the account to just €400m.
Mr Burgos said Madrid may have to use “all mechanisms at our disposal” to meet payments, revealing that the next step may be a raid on the pension system’s €67bn Reserve Fund. The pension system has been losing contributors as unemployment soars to 25pc. It shed a further 137,000 jobs in August.
Meanwhile, official data shows that the toxic property loans of Spain’s four nationalised banks have reached €75bn and are rising faster than feared. Bankia’s “potentially problematic” loans are €42bn.
The biggest surprise is a 50pc surge in bad debts to €9bn at Cataluyna Caixa since January. Non-payments on mortgages have doubled.
Nomura’s Jens Nordvig said Spain’s crisis has entered a “more dangerous phase”, resembling the sort of currency dramas once confined to emerging markets.
Capital flight has been running at an annual rate of 50pc of GDP, more than twice the rate in Indonesia during the Asian meltdown in the 1990s.
Foreigners have sold Spanish securities worth 19pc of GDP over the past quarter. Spanish residents have shipped funds worth 16.7pc of GDP into foreign bank accounts.
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Net claims on Spain through the ECB’s Target 2 payments system have reached 39pc of GDP.
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“The build-up in central bank liabilities is explosive,” said Mr Nordvik.
Germany now seems fully behind the bond plan of ECB chief Mario Draghi. Jorg Asmussen, Germany’s ECB board member, said today that bond purchases are necessary to save the euro and, therefore, within the bank’s mandate.
“The risk premia of sovereign bonds now reflect not just the insolvency risk of some countries but an exchange rate risk, which should not theoretically exist in a currency union. The markets are pricing in a break-up of the eurozone. Such systemic doubts are not acceptable,” he said.
Two-year bold yields in Spain plummeted by 44 basis points to 2.94pc and Italy’s fell to 2.29pc after Mr Draghi told MEPs that purchases may target debt of up to three years, longer than assumed.
Jacques Cailloux from Nomura says investors should be wary of the political minefield ahead. “We expect Spain and Italy to resist calling for help, promoting renewed market deterioration,” he said.
.
There is little doubt that Spain will need a rescue as it struggles to raise €40bn over the next two months. The country’s finances are unravelling on every front, with internal rescues for Catalonia, Valencia, Murcia, and Andalucia fast depleting the €18bn fund set aside for the regions.
It emerged today that Spain’s social security system has raided a rainy-day fund to cover state pensions for the first time as deepening recession erodes contributions.
.
Tomas Burgos, social security minister, said the government had drained €4.4bn from the Fondo de Prevencion – financed from workers’ illness insurance – to meet the shortfall in July, reducing the account to just €400m.
Mr Burgos said Madrid may have to use “all mechanisms at our disposal” to meet payments, revealing that the next step may be a raid on the pension system’s €67bn Reserve Fund. The pension system has been losing contributors as unemployment soars to 25pc. It shed a further 137,000 jobs in August.
Meanwhile, official data shows that the toxic property loans of Spain’s four nationalised banks have reached €75bn and are rising faster than feared. Bankia’s “potentially problematic” loans are €42bn.
The biggest surprise is a 50pc surge in bad debts to €9bn at Cataluyna Caixa since January. Non-payments on mortgages have doubled.
Nomura’s Jens Nordvig said Spain’s crisis has entered a “more dangerous phase”, resembling the sort of currency dramas once confined to emerging markets.
Capital flight has been running at an annual rate of 50pc of GDP, more than twice the rate in Indonesia during the Asian meltdown in the 1990s.
Foreigners have sold Spanish securities worth 19pc of GDP over the past quarter. Spanish residents have shipped funds worth 16.7pc of GDP into foreign bank accounts.
.
Net claims on Spain through the ECB’s Target 2 payments system have reached 39pc of GDP.
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“The build-up in central bank liabilities is explosive,” said Mr Nordvik.
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