Analysis: ECB sets stage for euro rescue but will Spain jump?

PARIS Thu Sep 6, 2012 2:37pm EDT

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PARIS (Reuters) - European Central Bank President Mario Draghi has delivered a roadmap for rescuing the euro zone from potential meltdown but the onus is now on Spain to swallow its pride and apply for help to bring down crippling borrowing costs.

Draghi met or exceeded market expectations by announcing on Thursday that the ECB was ready to buy unlimited amounts of bonds of up to three-year maturity of countries that request a European bailout and fulfill strict policy conditions.

The Italian ECB chief asserted his authority by isolating dissent from Germany's Bundesbank, which publicly criticized the decision, while maintaining pressure on euro zone governments to pursue budget discipline and economic reforms.

However, his escape route from the euro zone's sovereign debt crisis, which has raged since early 2010, hinges on Madrid requesting assistance, which Prime Minister Mariano Rajoy still seems to be wriggling to avoid or delay.

Other political landmines litter the road out of danger, ranging from Germany's constitutional court to Greece's failure to meet its fiscal targets, and the growing reluctance of Dutch, German and Finnish lawmakers to support any further bailouts.

And the euro zone's 17 governments are still far from agreeing to pool more sovereignty in a closer fiscal, banking and economic union to fix the single currency's design flaws.

But the ECB decision does at least offer the prospect of a turning point in the crisis by providing a conditional buyer of last resort for vulnerable countries' bonds.


Draghi's insistence on seeking International Monetary Fund involvement in designing and enforcing the policy conditions of any rescue program could make it politically harder for Spain. Rajoy is desperate to avoid the humiliating quarterly monitoring visits by a "troika" of IMF, EU and ECB inspectors, that were imposed on Greece, Ireland and Portugal in return for bailouts.

"We wonder whether the 'Troika-esque' appearance of the ECB's Outright Monetary Transactions might result in Spanish resistance to petitioning for such a bailout," Rabobank rates strategist Richard Mcguire said. "If so, market pressure may be needed for Spain to agree to a program."

So even though Draghi's statement cheered investors, sending Spanish bond yields tumbling and European shares soaring, more market flare-ups may be in prospect if Madrid tries to tough it out and get over an October funding hump without a bailout.

Italy, the other southern European country under severe bond market pressure, is hoping that euro zone and ECB support for Spain will douse down markets and spare it from having to seek direct help for itself.

After talks with German Chancellor Angela Merkel as the ECB council met, Rajoy made clear he was in no hurry to apply for a program and told incredulous journalists they had not discussed conditions for possible assistance.

Sources familiar with recent discussions say France and the European Commission have urged him to apply for a program in time for an October 18-19 European Union summit to approve a rescue. That would ensure ECB bond-buying could be activated before Madrid's refinancing crunch later next month.

Germany's position is more ambivalent, partly because Merkel must await a September 12 Constitutional Court ruling on the legality of the euro zone's permanent bailout fund to know whether her hands will be tied.

The chancellor may also be hoping to avoid having to ask her parliament to approve yet another euro zone bailout if there is any chance of avoiding it.

Rajoy angered German hardliners and some ECB policymakers at the weekend by saying Spain was already meeting all European guidelines on fiscal and economic reforms and should not be subject to extra conditions. His defiant tone provoked calls for stricter conditionality.

Standing alongside Merkel, Rajoy insisted he would not cut pensions, which many economists say would be a likely bailout condition, given the unsustainable strain on Spanish public finances.

Political analysts say the conservative premier is keen to avoid more unpopular austerity measures before regional polls in the Basque country and his native Galicia on October 21.


Bundesbank President Jens Weidmann, the sole dissenting voice on the ECB council, warned that central bank bond-buying could lead governments to postpone necessary reforms.

The ECB was embarrassed last year when former Italian Prime Minister Silvio Berlusconi laughed off reform pledges shortly after the central bank had begun buying Italian bonds.

Echoing German fears of a back-door "debt union", Weidmann said the new plan could ultimately redistribute considerable sovereign risks among countries' taxpayers without the consent of democratically elected parliaments and governments.

But no other central banker sided with him and Merkel -- keen for the ECB to stabilize the euro zone -- sent her party stalwarts out to endorse Draghi's action while saving Weidmann's face by saying his concerns had helped shape the decision.

Despite Draghi's assurance that the ECB would stop bond purchases if a country fails to respect the conditions, analysts question how the central bank could realistically pull the plug on a government that veered off course and missed its targets, at the risk of pushing it into bankruptcy and plunging the whole currency bloc into chaos.

In a note to investors, Gary Jenkins of Swordfish Research said: "The ECB's 'control' position is a bit like putting a gun to its own head and threatening to pull the trigger."

But Draghi has moved to underpin the euro zone's weaker members, reducing the chance of a calamity.

"The framework announced today creates a substantial and credible firewall," said Marco Valli, economist at Unicredit, describing it as a game changer.

"The risk that the government of a systemic country will backpedal on reforms or even fail to agree on conditionality is still there and will continue to exist, but it is definitely good news to hear that this is now the only risk that markets should be pricing in."

(Writing by Paul Taylor, editing by Mike Peacock)

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Comments (5)
koconnor100 wrote:
Draghi met or exceeded market expectations by announcing on Thursday that the ECB was ready to buy unlimited amounts of bonds of up to three-year maturity of countries that request a European bailout and fulfill strict policy conditions.
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Im sorry. Your solution to the indebtedness of these countries like spain and greece is … to drive them deeper in debt ? What exactly is your plan when in three years they’re now thrice as much in debt as before and still can’t pay it off ?

There comes a time when you must talk bankruptcy.

Sep 06, 2012 1:35pm EDT  --  Report as abuse
dareconomics wrote:
Spain is in a lot worse shape than people realize. I was reading an article in the WSJ, and I came across a very interesting sentence:

The auctions mean that Spain has now completed almost 77% of its borrowing needs for this year.

Like a lot of you, I have been following this Eurocrisis for quite some time, and I wondered if the various numbers being thrown around were accurate. In the Spanish case in particular, the mainstream media has been counting down remaining Spanish financing needs.

What piqued my interest in the 77% figure is that it has been consistently rising as Spain auctions debt, but Spain’s budget deficit has worsened from 5.3% of GDP to 6.3% officially to 8.08% unofficially based on projections from the first half. I decided to add up all Spanish debt sales year-to-date and see how they compared to the budget deficit plus the amount of old debt that needed to be rolled over.

Allow me to work through the math. (All figures rounded. Check out the chart for the exact numbers) I added up all of the bond sales including the September 6 auction. Next, I subtracted the short-term bill sales that would mature by the end of the year, because those sales do not reduce the financing needs for 2012. I obtained €102bn.

This number is supposedly 77% of Spain’s financing needs for the year based on the sentence from the WSJ above. Dividing €102bn by 77% yields an implied figure of €133bn for the rest of the year meaning that Spain has to sell about €31bn in bonds for the rest of 2012.

My calculations show that this number is way off. Spain has €98bn in debt coming due in 2012. Adding the projected budget deficit of 6.3% of GDP, €74bn, gives us financing needs of €172bn. That means remaining financing needs from now until the end of the year are €70bn, and Spain is only 60% of the way there, not 77%.

The situation is actually much worse than this…

Read more here:

Sep 06, 2012 4:16pm EDT  --  Report as abuse
MM_CAN wrote:
what is a few hundred billions among the friends.

Sep 07, 2012 5:30am EDT  --  Report as abuse
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