First shots in the battle for Spain?

As eurozone officials scramble to create a rescue plan Spain is prepared to accept, markets are holding their breath to see whether promises to save the union can be delivered.

Financial markets will remain tense this week, as investors wait to see whether Europe will finally fire the first shots in the 'Battle for Spain', or whether – as has so often been the case in the past few years – European officials fail to deliver on their grand promises.

Market hopes were buoyed last week by the fighting words of ECB boss, Mario Draghi, who last Thursday promised that the bank was "ready to do whatever it takes” to protect the eurozone. "Believe me, it will be enough”, he added, enigmatically. His promise was reinforced by German Chancellor Angela Merkel and French President Franois Hollande, who on Friday issued a joint statement on Friday saying they were "determined to do everything to protect" the eurozone.

Draghi's comments soothed the nerves of investors, who had started to worry that Madrid was losing access to capital markets and would be forced to seek an official bailout soon. Spain’s borrowing costs immediately plummeted from a euro-era high of above 7.5 per cent, to below the critical 7 per cent level, while those of Italy fell closer to 6 per cent from around 6.5 per cent.

According to the French newspaper Le Monde, European officials have decided to use the eurozone’s bailout fund to directly buy debt issued by Rome or Madrid, which would keep their borrowing costs at reasonable levels. The ECB would also launch a bond-buying program in the secondary market, which would keep long-term Italian and Spanish interest rates from rising sharply. "The ECB will not act without the governments: it will act if they are ready to activate the bailout funds”, it quoted one European official as saying.

But there is a slight hitch with this approach. Spain needs to formally request the eurozone’s bailout fund to buy its bonds, and so far Spanish leader Mariano Rajoy has refused to do so, because he doesn’t want the political humiliation of being forced to sign up to a tightly supervised bailout program. As a result, officials in Brussels are scrambling to find a different approach, with lighter supervision and less stringent budgetary constraints, that Madrid will be prepared to accept.

But already, markets are beginning to question whether the European battle plan will work, particularly particularly after the powerful German central bank – the Bundesbank – repeated that it was strongly opposed to having the ECB buy up government bonds.

And their scepticism increased further after German finance minister, Wolfgang Schuble, doused speculation that Spain had asked for the eurozone’s bailout fund to step in and buy its bonds in order to push its borrowing costs lower. "There’s nothing in it”, he said in an interview published in the Welt am Sonntag newspaper.

In an apparent effort to dispel these German-inspired doubts, the head of the group of European finance ministers, Jean-Claude Juncker, overnight insisted that the eurozone’s bailout fund was ready to act in concert with the ECB to calm the raging debt crisis.

"We’ve reached a crucial point. But we still have to decide the pace and the extent. We will act together with the ECB, without affecting its independence", he said in an interview with the French newspaper Le Figaro, which was posted online on Sunday night.

Juncker also launched a heated attack on European politicians for allowing domestic political considerations to colour their response to the eurozone debt crisis. "How can Germany allow itself the luxury of playing domestic politics on the back of the euro?’ he demanded. "Isn’t the eurozone more than a branch of the Federal Republic?’