Spain pledges reform timetable, paves way for bailout

NICOSIA Fri Sep 14, 2012 7:13pm EDT

1 of 3. Spanish Economy Minister Luis de Guindos looks on during a meeting of Ibero-American finance ministers and delegations in Madrid September 11, 2012.

Credit: Reuters/Andrea Comas

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NICOSIA (Reuters) - Spain told euro zone finance ministers on Friday it will set clear deadlines for structural reforms by the end of the month, in a move European diplomats said would pave the way for an aid request before long to help it tackle its debt pile.

Madrid's borrowing costs have fallen sharply since the European Central Bank said it was ready to buy Spanish bonds but big borrowing needs before the year-end and a deepening recession mean most analysts and policymakers believe it is only a matter of time before it will require help.

"We will adopt a new set of reforms to boost growth ... It will be in line with the recommendations of the European Commission," Economy Minister Luis de Guindos told reporters after meeting his peers in Cyprus.

Euro zone policymakers have said that to get aid, Spain would need to adhere to strict conditions, which usually entail detailed reforms and concrete deadlines, rather than vague plans.

Madrid's move is therefore seen by EU diplomats as a precursor to a request that pre-empts any euro zone calls for further reforms in an attempt to limit a political backlash at home, although de Guindos insisted the package was unrelated to any bailout terms.

"This is a blueprint for a fiscal and structural program, this is a blueprint for a way forward," said one senior EU diplomat on condition of anonymity.

"Yes, we're moving towards a bailout but now a decision has to be taken by (Spanish Prime Minister Mariano) Rajoy. And right now, it's hard to know his intentions," the diplomat added.

The new reform program will be made public along with the 2013 budget on September 28, the day Madrid will also publish the results of a final stress test of the country's banking sector.

A second official said the measures, if credible, would give a clear indication that Spain was willing to seek aid.

"They are discussing it with the European Commission, which gave rather positive feedback. If the measures are credible, the way is clear," the source said.

Both EU officials said the most likely form of help Spain could seek was a precautionary credit line from the European Stability Mechanism (ESM) rescue fund.

Such a credit line would allow the ESM to buy Spanish bonds at auctions, leaving the European Central Bank free to intervene on the secondary market. The euro zone could barely afford a full bailout of the sort given to Greece, Portugal and Ireland.

"No one wants Spain to ask for a full bailout, that wasn't even discussed," French Finance Minister Pierre Moscovici said.

Euro zone officials have speculated Spain could apply in time for the next meeting of euro zone finance ministers on October 8.

Madrid has so far resisted austerity conditions that go beyond the EU policy recommendations it is already implementing, while north European creditors led by Germany are adamant that any aid would come on tougher terms.

ECB President Mario Draghi, who attended the Nicosia talks, stressed any bond-buying would require strict conditionality and Executive Board member Joerg Asmussen noted there was nothing automatic about ECB starting on Spanish bond purchases, even once Madrid were to formally apply for ESM help.

But one diplomatic source said that there were teleconferences almost every day among the members of the committee working on the bond-buying scheme.

"Euro zone central banks are getting ready to buy bonds on the markets," the official said. "If interventions start, the ECB will decide the daily amount and pass to the national central banks the responsibility to act on the secondary markets."

For the first time in months, ministers met at a moment when market pressure for immediate action to solve the sovereign debt crisis is easing, rather than mounting.

The ECB's announcement that it could buy unlimited amounts of Spanish bonds, should it agree a program with the euro zone bailout fund, has brought Spanish 10-year bond yields down more than two percentage points from a peak of 7.64 percent on July 24.

Italian yields have fallen to around 5 percent and the euro rose above $1.30 after the U.S. Federal Reserve announced a new program of asset purchases to support the economy. <MKTS/GLOB>

"I am not an expert on the markets but my impression is that we still have a bit of time," Moscovici said.

That increases the temptation for Spain, and EU paymaster Germany, to try to get by without an assistance program that would be politically difficult in both Madrid and Berlin. Each time market stress has eased in the nearly three-year crisis, German leaders have said they see no urgent need to act.

"There is no more room for complacency than there was six months ago, but we are moving in the right direction," European Economic and Monetary Affairs Commissioner Olli Rehn cautioned.

A German official said Berlin did not want to see Spain pushed into an unnecessary rescue application at a time when its funding conditions were improving, adding that a Spanish bailout was not inevitable.

MORE TIME FOR GREECE?

The Nicosia meeting also devoted time to Greece, the cradle of Europe's sovereign debt crisis.

EU officials have told Reuters that Athens is way behind on its debt-cutting program but, having made strenuous efforts to shore up Spain and Italy, it would make no sense to tip Greece into default now and plunge the currency bloc back into chaos.

International Monetary Fund chief Christine Lagarde said it was worth considering giving Greece more time to make the cuts demanded of it by its bailout program, something Athens has requested.

"It seems to us quite clear that Greece has already produced a huge effort but will have to continue to do so," Lagarde said. "And the target when it comes to achieving debt sustainability is very high, so there are various ways to adjust: time is one and that needs to be considered as an option."

International lenders are likely to reach final decisions on the revised financing program for Greece in the second half of October, Greek Finance Minister Yannis Stournaras said.

Austrian Finance Minister Maria Fekter said Greece could be given more time to reach its fiscal targets but not more money. She also said the Cyprus had told the meeting it would not be able to continue without financial assistance.

Another euro zone official said Spain should have euro zone support ready when international lenders present their report on Greece in October, because it will make grim reading and could upset markets, boosting Spanish and Italian borrowing costs.

Draghi said the central bank's policy decision was just one of a number of measures which had turned market sentiment.

"Many things seem to fall into place of late: progress in the euro area governance, significant progress at national level in pursuing the right policies in all euro area countries and now you have a fully effective backstop mechanism that is meant to remove to the tail risk from the euro area," he said.

"I think it is a combination of all these elements that have produced the positive effects that we have seen on financial markets."

Markets rallied after the German constitutional court cleared the way to set up the 500 billion euro permanent euro zone bailout fund ESM. Pro-European parties won elections in the Netherlands and the euro zone is moving towards a banking union with the ECB as the single supervisor.

But many policymakers and market analysts believe that for yields to fall further, or even stabilize at these levels, the ECB will have to back up its words with action.

(Additional reporting by Dan Flynn, Annika Breidthardt, Jan Strupczewski, Michele Kambas, Francesca Landini, Robin Emmott and John O'Donnell. Writing by Paul Taylor/Mike Peacock)

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Comments (1)
dareconomics wrote:
Spain Pledges Reforms to Avoid Troika Bailout

I think that the title of this blog post is more accurate than the headline selected for the article by the editor. Every time a European government requests a bailout, it is thrown out of office. Political survival is driving the decision makers in Spain.

Don’t pay attention to the mainstream media. Spain needs a bailout right now. The fiscal situation is perilous, and it is rapidly bleeding cash from its financial system:

http://dareconomics.wordpress.com/2012/09/06/actual-spanish-financing-needs/

http://dareconomics.wordpress.com/2012/09/08/actual-spanish-financing-needs-part-2/

http://www.zerohedge.com/news/chart-spains-mariano-rajoy-wishes-could-be-swept-under-rug

Rajoy’s political survival depends on him getting his hands on German money without the event being construed as a humiliating troika bailout. Germany cannot bailout Spain without humiliating conditions, which makes the aid politically acceptable to its electorate.

What the Spanish government is trying to do is have its own preemptive bailout. By adopting harsh refroms on its own, it hopes that these s will be sufficient and preempt the need for troika conditions with their attendant inspections, loss of Spanish sovereignty and general humiliation.

This is an interesting gambit, but I cannot see it succeeding. If Spain was to obtain a sweetheart bailout, the countries who did not, Portugal, Spain and Ireland, will be miffed, and there will be a backlash.

In any event, Spain will not seek a bailout before regional elections on October 21. If Rajoy does, his party will surely lose these elections. This loss of power could lead to his own government coming down.

We should expect Spain to keep delaying its inevitable bailout requests as long as possible after regional elections. There will be pledges, meetings and negotiations, but there will not be a bailout request until Spain starts bouncing checks.

Sep 17, 2012 9:51am EDT  --  Report as abuse
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