Rearranging bonds on the Spanish Titanic

As Spain gets closer to a bailout, there are calls for Germany to issue eurobonds to pave the way for a 'banking union'. Berlin insists these measures cannot be introduced quickly and austerity is still required.

Spain teetered even closer to a bailout overnight with the country’s budget minister Cristbal Montoro stunning investors by conceding that Spain "does not have the door to the markets open”.

His comments were designed to ratchet up the pressure on Berlin to allow the eurozone’s bailout fund to pump money directly into Spanish banks. Instead, investors worried that Greek, Portuguese and Irish politicians had also complained of being shut out of capital markets immediately before those countries were forced to seek bailouts.

Spain’s borrowing costs have climbed sharply after the Spanish government said it would rescue the troubled lender, Bankia, which needs €19 billion ($US23.7 billion) in fresh capital. Analysts estimate that the Spanish government could be forced to inject between €50 billion and €100 billion in capital into country’s banks, which have suffered crippling losses following the collapse of the country’s property bubble.

In an interview on Spanish radio, Montoro said the amount of money required by the banks was not "astronomical”. But, he said, "the problem is where to get [the funds] from”.

Madrid, with the support of Paris, has been arguing that the eurozone’s €440 billion bailout fund should be allowed to lend directly to banks. This would spare Spain the humiliation of being forced to seek a full-scale bailout and of having its budgets dictated by the "troika” – officials from the European Union, the European Central Bank and the International Monetary Fund.

In the interview, Montoro argued that a bailout of Spain, the fourth largest economy in the eurozone, was not technically possible. Instead, he insisted, "European institutions must get moving and find this bank recapitalisation”.

But Berlin remains implacably opposed to this approach, which it believes would reduce the pressure on debt-laden governments to cut their budget deficits, and would leave the eurozone’s bailout fund holding a grab-bag of equity stakes in troubled banks.

Overnight, Volker Kauder, who is a senior ally of German Chancellor Angela Merkel, said that the bailout fund had been created to help countries that needed to support their banks, and he urged Madrid to decide quickly whether it needed to tap that money.

Meanwhile, finance ministers and central bankers from the Group of Seven leading nations held a teleconference overnight, in an attempt to force Europe to embrace a more radical solution to stem the region’s escalating debt crisis, which is now threatening the global economy.

Although there was no official statement from the G7 after the meeting, a US Treasury official said that the group discussed European policy responses, and the progress the region was making in moving towards financial and fiscal union.

Germany is under intense pressure to alleviate Europe’s troubles by allowing the issue of "eurobonds”, which would be jointly guaranteed by all eurozone countries, and to give its blessing to a "banking union” which would guarantee deposits in all eurozone banks.

But Berlin is insistent that these measures cannot be introduced quickly, and so are not a panacea for Europe’s current woes. In an interview published overnight in the German financial newspaper, Handelsblatt, German finance minister, Wolfgang Schuble said that a "genuine fiscal union” was needed before the eurozone could introduce eurobonds or contemplate a banking union. These initiatives, he stressed, were a "medium-term project”.

Schuble said the eurozone needed to go "step by step”, adding that the fiscal pact that Berlin had forced eurozone countries to adopt had "opened the path towards greater integration”.

He also showed no sign of questioning whether austerity was the right approach to dealing with the eurozone’s problems, saying that there was "no easy path” for Greece and Spain. Countries affected by the debt crisis, he said, "cannot avoid reforms” in order make their economies more competitive.


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