Germany opens door for crisis solution as Spain downgraded

Moody's is the last of the three largest ratings agencies to slash Spain's A status. The downgrade means that the government's borrowing costs - already close to bail-out territory - will rise even higher.

Explaining the downgrade, Moody's said eurozone's €100bn rescue announced last weekend for the Spanish banking sector will only increase the government's debt and make its budget-cutting measures even more difficult and lengthy.

It concluded that the Spanish government will run the risk of having to ask for a full bail-out from the eurozone rescue funds.

The analysis deals a blow to Germany which insisted the eurozone's bail-out funds not be used directly to recapitalise Spain's banks but have the government take on the loan.

But the mood in Berlin is gradually shifting towards an understanding that the link between the government and banks will have to be broken in order to come to grips with the crisis.

EUobserver understands that the German government is opening up to proposals for a "banking union" aimed at increasing supervision at European level but also granting banks direct access to the eurozone bail-out funds.

Speaking to journalists in Berlin on Wednesday, Ferdinand Fichtner, an economist from the government-funded German Institute for Economic Research (DIW) said:

"The plans for a banking union are a good proposal because they deal with the core of the crisis, the fact that state debt and the banking system are too interlinked. We've seen that in Spain and Ireland and to a lesser degree in Greece."

Redemption fund - a German referendum

As for the idea of joint debt in the eurozone - either in the form of eurobonds or a so-called debt redemption fund which would lower the borrowing costs for countries like Spain and Italy - Fichtner said no such move should be made unless a full fiscal union was in place.

"Common liability without effective controls of fiscal policies would pose a risk to transform this into a debt union," he argued.

The debt redemption fund idea was tabled last year by a group of German 'wise men' and is seen as the only acceptable compromise to Angela Merkel's coalition government, provided there are steps to a fiscal and political union.

This would also likely mean Germany would have to hold a referendum on changing its own constitution to allow for budget powers to be transferred to Brussels.

The debt redemption fund - also proposed by the European Parliament on Wednesday (13 June) - would have joint issuance of debt in the eurozone for countries whose debt is above the EU threshold of 60 percent of GDP.

In its legal analysis, the German government maintains that this would be a breach of the 'no bail-out clause' embedded in the EU treaties. But it is also willing to accept it as a last resort solution if the whole eurozone is endangered and as long as it would not be permanent.

The German parliament is also likely to have its say over the issuance of any such joint debt.

This fund idea is part of ongoing talks between the German government and the opposition, whose support is needed to ratify the fiscal discipline treaty and the treaty allowing for the creation of the permanent bail-out fund, the European Stability Mechanism. Merkel is aiming to secure the vote before an EU summit on 28-29 June.