Wednesday

20th Nov 2019

Germany stays tough on eurobonds, opens up on Spain

  • Berlin's Brandenburger Gate: Germany holds firm on debt mutualisation (Photo: Wolfgang Staudt)

German Chancellor Angela Merkel has again rejected the idea of joint debt, but her government is reportedly looking at ways to give direct aid to Spanish banks.

Speaking at a closed gathering of her Liberal coalition partners on Tuesday, Merkel reportedly said: "I don't see total debt liability as long as I live." Some of the people in the crowd then wished her a "long life", participants to the event told several news wires and Spiegel Online.

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Her spokesman later that day refused to confirm or deny the quote.

Earlier in the day, a report drafted by the chiefs of the European Council, Commission, Central Bank and the Eurogroup of finance ministers proposed, "in a medium term perspective, the issuance of common debt."

But far from the French model of "eurobonds", the four listed only very 'limited' and 'conditional' debt issuance, such as short-termed euro-bills or the the "gradual roll-over into a redemption fund" and only if strict rules are respected.

Merkel has repeatedly made it clear that the only way Germany would allow joint debt sharing was if the EU would become a truly political union where large parts of budgetary and fiscal sovereignty is handed over to Brussels. France, in contrast, wants more solidarity before any concessions on sovereignty.

The middle ground sought by the four EU chiefs is to make progress on both fronts. They also propose setting up a more centralised supervision of banks in the eurozone with a fund topped up by the banks themselves which would be used to rescue any of them and with a Europe-wide deposit guarantee scheme ultimately backed by the eurozone bailout funds.

But none of these ideas solves the immediate crisis of Spain's too-high borrowing costs - costs that have not come down despite the promise of a bailout for its troubled banks.

Despite the noise on the long-term eurobonds, the German government is looking at ways to allow the Spanish banks to be funded directly by the bailout funds, reports Financial Times Deutschland. According to the paper, the plan would bfor the bailout to go directly to the state-owned authority for bank resolution, Frob, instead of lending it to the government which in turn would hand it out to the banks. This would take the debt off the government's books, a key demand by Madrid.

Reuters has also seen a draft proposal by Merkel's coalition to change the rules to the permanent European Stability Mechanism to allow it to fund national bank rescue funds. A vote in the Bundestag on the ESM is scheduled Friday afternoon, after the EU summit.

Pressure for such changes has come from the International Monetary Fund, the US government, as well as Italy - which could be the next in line for a bailout.

Speaking in parliament on Tuesday, Italian Prime Minister Mario Monti said he would not just rubber stamp conclusions of the EU summit and was ready stick it out until Sunday evening if necessary.

In a bid to iron out their euro-differences, Merkel and France's Francois Hollande will meet Wednesday night in Paris. An extended meeting with Monti and the Spanish Prime Minister last Friday did not make much headway, however.

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