As Spain’s borrowing costs pushed it closer to needing a bailout, the country’s economy minister Luis de Guindos has been asking for help from his French counterpart Pierre Moscovici.
He got the Paris government’s support for fast implementation of a European agreement to use bailout funds to stabilise the region’s bond markets.
Both ministers stressed the high interest rates Madrid is having to pay to borrow do not reflect Spain’s economic fundamentals, its growth potential and the sustainability of its public debt.
Economist Rafael Pampillon at the Madrid Business School said: “Solutions will have to come from outside Spain. They could come either from the European Central Bank, if it decides to buy Spanish bonds in the secondary market so yields fall. Another solution is for the European Rescue Fund to buy public debt. If not, we’ll have a full-scale bailout and a bailout of the Spanish economy would represent a lot of money for Europe.”
The pressure is on Spain’s government because it has to borrow 50 billion euros by the end of the year to pass on to its heavily indebted regions and to fund a higher than expected deficit.
The European Central Bank helped earlier in the year by making available one trillion euros in cheap loans, but now that money is gone, most international lenders won’t touch the country’s debt and even Spanish banks are not enthusiastic about buying the country’s bonds which is putting the squeeze on Spain’s treasury.
France and Spain also called for common eurozone bank supervision to be put in place by the end of the year to further help the stricken Spanish banks.
“Our common strategy for the stability of the euro area includes the adoption, by the end of this year, of a single supervisory mechanism for banks of the euro area, involving the ECB,” de Guindos and Moscovici said in a joint statement.
“We expect proposals by the Commission by September and commit to a swift negotiation. This supervisory mechanism will open the way for direct recapitalisations with appropriate conditionality,” they said.
The proposed banking union needs to be in place before the eurozone’s permanent ESM rescue fund can provide aid directly to banks, under measures agreed at the June 28-29 summit to make the EFSF/ESM rescue funds more flexible and efficient.