Europe Bides Time on Spain, Relies on ECB to Soothe Markets

European governments put off decisions on aid for Spain and a loosening of Greece’s loan terms, counting on the European Central Bank’s bond-buying pledges to provide interim relief from market turmoil.

Finance ministers meeting in Cyprus pressed for a fresh set of reforms to rebuild confidence in Spain’s economic management and said the fate of Greece’s 240 billion-euro ($315 billion) rescue program won’t be decided until late October, possibly at a crisis summit of leaders.

The central bank, which helped drive the euro to a four- month high by stepping up rhetoric to fight Europe’s debt turmoil, warned that it has only bought time for governments to deliver the deficit-cutting and growth-boosting steps needed to stabilize the economy.

“The amount of time that we have -- it’s a very difficult question to answer,” ECB President Mario Draghi told reporters today after meeting the euro-region ministers in Nicosia, the Cypriot capital. “You have to ask the markets. If we continue going this way, then one has to be very optimistic.”

The euro rose as much as 1.4 percent to $1.3169, the highest since May 4. It traded at $ 1.3142 at 6:45 p.m. Cyprus time. Spain’s extra 10-year borrowing cost over German levels narrowed held at 408 basis points. Italy’s 10-year spread declined by 13 basis points to 331 basis points, the lowest since April 2.

Market Strength

“All the leaders as well as the ECB are sitting with their hands tightly clutched to their seats hoping that they are not actually tested, that their resolve is not tested,” Sony Kapoor, managing director of policy advisory firm Re-Define, said in a Bloomberg Television interview in Brussels. “The one thing they don’t want to find out is whether what they have done is enough or not.”

Financial markets continued to draw strength from the ECB’s Sept. 6 offer -- with conditions attached -- to go on a bond- buying mission, and a Sept. 12 ruling by Germany’s constitutional court that cleared the way for the setup of a 500 billion-euro permanent bailout fund, known as the European Stability Mechanism.

‘Fully Operational’

Finance ministers will inaugurate the ESM on Oct. 8 and pay in the first two equity installments of 32 billion euros by the end of October, making the fund “fully operational,” Luxembourg Prime Minister Jean-Claude Juncker said after chairing today’s meeting.

“There is no more room for complacency today than there was six months ago but we are, I believe, moving into the right direction,” European Union Economic and Monetary Commissioner Olli Rehn said.

European officials said Spain will unveil new reforms by the end of the month based on recommendations made in July that cover areas such as a possible increase in the retirement age, a shift from labor to consumption taxes and the deregulation of closed professions.

Complaining of the flu, Spanish Economy Minister Luis de Guindos took a short break from the meeting. He later returned to confirm the new commitments, pledging a “plan of reforms to boost growth and competitiveness” and reaffirming the goal of cutting the deficit to 6.3 percent of gross domestic product in 2012 from 8.9 percent last year.

Spanish Banks

Spain, already drawing on 100 billion euros to repair its banking system, wants the lightest possible conditions on a European credit line or loan program that would also enable the ECB to buy bonds to bring down its borrowing costs.

Finance ministers are also in a holding pattern on Greece, the first victim of the crisis. Greek Prime Minister Antonis Samaras is facing hurdles within his coalition to proposed wage and pension cuts to meet creditor demands for 11.5 billion euros in budget savings.

Until then, the next installments of Greece’s loan package are on hold. Juncker called on Greece to use the next month to deliver “real game-changers” in turning around its indebted, recession-wracked economy.

While ruling out extra funds, Austrian Finance Minister Maria Fekter said Greece may end up getting more time to meet deficit-cut targets as long as it makes those commitments.

“There are various ways to adjust -- time is one,” International Monetary Fund Managing Director Christine Lagarde said. “That has to be considered an option.”

Greek Finance Minister Yannis Stournaras was asked if he had received any indication that Greece would gain more time from the euro area and IMF to meet budget-cutting targets.

“It is on the table,” he said.

Dutch Finance Minister Jan Kees de Jager said giving Greece more time has always been the position of the Netherlands.

“But more money is not needed if they will take the measures timely,” he said. “There is no movement whatsoever this weekend on that topic. No more openness or so. The situation is the same. Greece has to do everything the troika asks.”

To contact the reporters on this story: James G. Neuger in Nicosia at jneuger@bloomberg.net; Jeff Black in Nicosia at jblack25@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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