German Chancellor Angela Merkel’s government said Spain’s bailout program should draw from the euro-area’s permanent backstop, a proposal that may rankle both the Spanish government and its bondholders.
Germany’s preference for the European Stability Mechanism, which is scheduled to be set up next month, threatens to clash with that of Spanish Prime Minister Mariano Rajoy. Spain said today that current investors won’t be affected, suggesting that it prefers tapping the temporary European Financial Stability Facility, set up in May 2010.
“If you want to use the more efficient option, then the ESM would be the preference,” German Finance Ministry spokesman Martin Kotthaus told a regular government press conference today in Berlin. That would subordinate investors to official funding, which has preferred creditor status under the ESM treaty.
ESM funding would be junior only to International Monetary Fund financing, while EFSF funds, backed by government guarantees, aren’t a preferred creditor. That motivated Finnish Finance Minister Jutta Urpilainen to demand collateral if the EFSF were used. The ESM will work off paid-in capital.
Since an ESM loan would be senior to other bond holders, “if the funds are raised this way, then the market will view that as a negative,” said Lyn Graham-Taylor, a fixed-income strategist at Rabobank International in London.
German Finance Minister Wolfgang Schaeuble said today that Spain’s 100 billion-euro ($126 billion) bailout would be placed under the supervision of the so-called troika of outside creditors, as with earlier rescues. Rajoy told reporters yesterday that the fresh funding didn’t constitute a rescue.
While the funds will be channeled to Spanish banks rather than as part of a “macroeconomic adjustment program,” the financing operation will be overseen by the European Commission, the European Central Bank and the International Monetary Fund, Schaeuble told Deutschlandfunk radio.
“There will still be a troika and they will still ensure that the program is being implemented,” Schaeuble said. The Spanish government is responsible for carrying out the program, he said, “but it’s focused solely on the restructuring of the banking sector.”
Spain’s government said the bailout wouldn’t undermine the conditions of its outstanding debt, a scenario more compatible with financing from the temporary EFSF.
“This financial assistance will not only not undermine the present conditions of the current stock of Spanish public debt, it will also reinforce its overall solvency,” the Economy Ministry in Madrid said in a statement.
Maria Dolores Cospedal, the deputy leader of Rajoy’s People’s Party, told reporters later that it was still to be decided which of the two funds would be used. The matter will be discussed at a European summit at the end of June, she said.
Euro finance ministers would prefer Spain to tap the permanent backstop, Norbert Barthle, the budgetary expert in Merkel’s party caucus, said in an interview.
Deploying the ESM would be more efficient because the 500 billion-euro fund has its own capital base, making it easier to raise funds, he said. At the same time, “we’re hostage to when Spain actually applies,” Barthle said.
The timing and details of the request from Spain will determine from which rescue fund the money comes, Steffen Seibert, Merkel’s chief spokesman, told reporters in Berlin.
Schaeuble, in his radio interview, compared the Spanish rescue to the U.S. government’s recapitalization of American banks in 2008. Although the U.S. banking rescue took months to be successful, the crisis was in the end “mastered” with sufficient funding, he said.
“That’s exactly why, based on the lessons we learned from the crisis, we urged Spain to supply the banks with sufficient capital, whether they want it or not,” Schaeuble said.
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