Eurozone crisis: is Germany about to go soft on Spain?

Jun 7, 2012
Tim Edwards

EU and German sources say Berlin is preparing to offer Spain a 'soft bailout' and spare it national humiliation

GERMANY is reportedly coming round to the idea of a "soft bailout" for Spain that would save Madrid the humiliation of opening its books to the International Monetary Fund and imposing deeper austerity on the country's fragile economy.

"Sources familiar with the German position" tell El Pais that "Berlin is ready to accept that the aid should have a special character that differentiates a Spanish rescue from that of other countries such as Greece, Ireland and Portugal, so that the conditions are softer".

Some economists accept that Spain has already put sufficient austerity measures in place and that its big problem is its banking sector.

The hope in Spain is that money – around €50-60bn – would be provided to recapitalise the Spanish banks directly. In return, Spain would have to accept certain conditions, but these would be restricted to the financial sector itself.

But is the suggestion wishful thinking on the part of El Pais?

Volker Kauder, the parliamentary leader of Chancellor Angela Merkel's ruling Christian Democrats (Merkel pictured with Spanish prime minister Mariano Rajoy), recognised that Spain's problems lie with its financial sector, but appeared to rule out a direct banking bailout without a wider rescue. "I do think that Spain has to come under the rescue shield. Not because of the country, but because of the banks," he told The Guardian.

But The Times, quoting EU sources, reports that Germany is indeed seeking a compromise, which might involve the €500 billion permanent rescue fund, the European Stability Mechanism, lending directly to Spain's Fund for Orderly Bank Restructuring – although the legality of such a step is questionable, given that bailout funds are supposed to be channeled through governments.

The advantage of using the ESM is that only a majority decision is required, which would allow objections from smaller countries such as the Netherlands and Finland to be ignored.

Tristan Cooper, a sovereign credit analyst at Fidelity Worldwide Investment suggested a 'soft' bailout would be welcomed, but that Spain has deeper problems, telling The Guardian: "The willingness to support Spain is there. The difficulty is designing a method that can satisfy Germany and the market.

"Although sick banks are Spain's most acute ailment, there are more chronic ones. These include the highest unemployment and the third widest fiscal deficit in Europe in a deep recession.

"Markets would react positively to an adequate bank recap solution. A structural change in investor sentiment requires the prospect of a sustainable economic recovery and a credible plan for achieving it."

Cooper was right. Markets jumped yesterday on the news, with the FTSE-100 enjoying its biggest one-day gain in six months.

Meanwhile, David Cameron, preparing to meet Chancellor Angela Merkel today, has piled the pressure on eurozone governments, saying that "speed is of the essence" in dealing with the eurozone crisis. "Every day that the European economies are stagnant are days when opportunities are lost, wealth is lost, jobs can be lost so we need to get our economies moving," he added.

Despite the British Prime Minister's call to arms, any decision on a 'soft' banking bailout for Spain is likely to be delayed pending the outcome of the IMF's report on the country's banking sector, due on Monday. In the meantime, Madrid faces a test of market sentiment today.

The Daily Telegraph reports that Spain will try to raise €2bn at a debt auction. Economist Nicholas Spiro told the paper: "Even though the size of the auction is modest, it will be the most challenging sale of the year given the mounting speculation that a bailout is imminent.

 "The lead-up to the auction has been a shambles, with the government itself conceding that it has lost market access."

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The way Angela Merkel is taking over decisions on the Eurozone, Hitler must be sitting up in his grave and saying HURRAH!  Germany won the war.  It would appear that Germany is going to rule Europe after all!