Sunday

24th Jul 2016

Spain in political blunder as bailout likelihood increases

  • Spanish borrowing costs reached 7.6 percent on Tuesday (Photo: Valentina Pop)

A Spanish minister angered Italy and France after claiming the two countries backed Spain in demands for speedier actions by the eurozone to bring down its record-high borrowing costs.

Both Rome and Paris on Tuesday (24 July) denied ever having issued a joint statement with Spain. The statement asked for the immediate application of a June deal, whereby banks could be funded directly by the eurozone bailout fund.

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The Italian government said it was "astonished" by the Spanish announcement, while French EU affairs minister Bernard Cazeneuve denied ever having signed it.

"I have not asked for the immediate application of the accords. It makes no sense to say that. We are following the decisions taken at the European summit and are working on them," Cazeneuve told AFP.

The Spanish EU affairs minister, Inigo Mendez de Vigo, later that day backtracked, saying he did not intend to say informal talks with Italy and France meant they had signed up to a joint statement.

Spain's borrowing costs hit 7.6 percent on Tuesday. This raises the pressure on Madrid to ask for a full-blown bailout, as the €100 billion earmarked for its banks failed to calm market fears that the country will go bust.

German finance minister Wolfgang Schaeuble, who on Tuesday received Spain's economy minister Luis de Guindos in Berlin, said the record-high borrowing costs mirroring "neither the economic fundamentals of Spain, nor its growth potential or the sustainability of its public debt."

De Guindos has so far strongly denied the need for a full-blown bailout. But so did Greek, Irish and Portuguese ministers before applying for help. The Spanish politician on Wednesday is travelling to Paris to meet French finance minister, Laurent Fabius.

The problem with a full-blown bailout is that the eurozone could barely afford it. The permanent rescue fund worth €500bn is not up and running yet, pending a decision of the German constitutional court in September.

And even when it is established, cash will be transferred gradually, so that only about €200bn will be made available by the end of this year. The temporary bailout fund, set up in 2010, is also running out of money after having allocated more than half of its €440bn loan guarantees on existing rescue programmes in Greece, Portugal and Ireland and the recently-agreed bank bailout for Spain.

Direct bank recapitalisation from the bailout funds - as agreed in June - would take the debt burden off the government's books and help lower its borrowing costs. But that move is only expected to happen at the earliest next year, after the European Central Bank is re-arranged so it supervises eurozone's banks.

The only way around a bailout would be if the ECB started buying up Spanish bonds again, as it did last year. A decision on this may be taken next week at a regular meeting of the ECB board.

Meanwhile, a panel of 17 leading economists at the New York-based Institute for New Economic Thinking issued a report in New York warning that "Europe is sleepwalking toward a disaster of incalculable proportions," with Spain, "the last domino", only "days away from a liquidity crisis."

"A successful crisis response must be collective and embody some burden sharing across countries. Absent this collective constructive response, the euro will disintegrate," they warn.

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