Saturday

1st Oct 2016

No 'concrete' plans for bonds rescue, Merkel says

German Chancellor Angela Merkel on Wednesday (20 June) said there are no concrete plans for the eurozone bail-out funds to buy bonds in order to relieve market pressure on Italy and Spain, even though this was one "option."

"There are no concrete plans that I know of but there is the possibility in the EFSF and the ESM to buy bonds on the secondary market, bound up of course always with conditions," Merkel said during a press conference in Berlin after meeting her Dutch counterpart.

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  • Bond rescues are 'not a subject for debate right now' Merkel said (Photo: vauvau)

"But that is a purely theoretical comment about the contractual situation. This is not a subject for debate right now," she added.

Italian Prime Minister Mario Monti earlier this week had floated the idea for the existent European Financial Stability Facility (EFSF) and the upcoming European Stability Mechanism (ESM) to buy bonds in order to drive down the borrowing costs of Italy and Spain.

But according to the existing rules of the two funds, this can only be done if a country formally requests assistance and signs up to a reform plan drafted by the European Commission.

The European Central Bank (ECB) would also be involved in assessing the financing needs, making the whole exercise very similar to any other bail-out - a scenario Rome wants to avoid.

Italy's debt levels - over 120 percent of GDP - are also close to the unsustainable threshold which could make it ineligible for the EFSF to grant aid.

Meanwhile, Spain, were it to seek such help, would need to have a sound banking system - which is not the case.

A spokesman for the EU commission on Wednesday noted that such intervention on the bonds market would be only a "financial paracetamol," offering just temporary relief, but no cure for the structural problems in Italy and Spain.

Spain on Thursday is expected to receive the results of a comprehensive audit of the financial needs of its banks, which are swamped by bad mortgages amid plummeting real estate prices.

Eurozone finance ministers meeting in Luxembourg the same day may then receive a formal application for funding, after having earlier promised up to €100 billion for Madrid to help the banks.

"It is important and right that Spain will in the next few days apply for aid that is specifically for the problems in their banks," Merkel said in Berlin.

The announcement of Spain's mini-bail-out for banks only has served only to fuel speculation that it will need a second full-blown state bail-out, with national borrowing costs now above seven percent.

Eurozone finance ministers are also to discuss which of the funds to use, as more than half of the €440-billion-strong EFSF has already been used for the Greek, Portuguese and Irish bail-outs.

"There is a strong preference among member states to use the ESM," one senior EU official said on Tuesday, in reference to the upcoming permanent bail-out fund to be gradually increased to €500 billion.

Madrid is reluctant to accept this because the ESM would have "preferred creditor status" like the International Monetary Fund, meaning private banks or investment funds buying Spanish bonds would have less of a priority in being paid back if there is a default.

The ECB last year bought up Spanish and Italian bonds and then injected a further €1 trillion in cheap loans for Spanish and Italian banks, among others, which used it to buy even more Spanish and Italian bonds.

This is unlikely to happen again.

Speaking to the Financial Times, Benoit Coeure, an ECB board member from France, ruled out the possibility and encouraged countries to apply for EFSF aid instead.

"Certainly it's a mystery why the EFSF was allowed almost a year ago to undertake secondary market interventions and governments have not yet chosen to use that possibility," Coeure said.

New EU rules on financial products in limbo

A feud between MEPs and the EU commission is threatening to derail financial services regulation that would protect consumers from misleading investment products.

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