Euro States Lay Groundwork for Bond Buys, Speed Spanish Aid

EU Commissioner Olli Rehn
Olli Rehn, the European Union's economic and monetary affairs commissioner. Photographer: Jock Fistick/Bloomberg

European governments laid the groundwork for possible purchases of Italy’s bonds and fast-tracked aid for Spain’s banks, trying to shield the euro area’s third- and fourth-largest economies from the resurgent debt crisis.

Finance ministers worked out a way for the euro bailout funds to intervene in bond markets and said the first 30 billion euros ($37 billion) of 100 billion euros in rescue loans will start flowing to Spanish banks this month.

“It’s always useful to have a certain reserve for possible unexpected developments,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said of the frontloaded Spanish loans at a press conference after a two-day meeting in Brussels.

Italian and Spanish bonds rose and European stocks advanced, as investors rewarded at least for today the attempt by euro governments to get ahead of the curve in battling the 2 1/2-year crisis that has shaken the 17-nation currency to its foundations.

Finance ministers left a number of blanks to be filled in, starting with how they will tide Greece through next month’s bond redemptions and whether the new government in Athens can ease up on austerity measures.

Greece, which spawned the crisis, is counting on an “intermediate solution” to keep it solvent through August while it negotiates more lenient aid terms, Finance Minister Yannis Stournaras said. Greece must repay at least 2.6 billion euros of debt held by the European Central Bank on Aug. 20.

Monti’s Shield

A separate accord to use the ECB as a buying agent for bonds purchased by the government-run bailout funds brought Europe a step closer to the “debt shield” demanded by Italian Prime Minister Mario Monti.

Monti, who doubles as Italian finance minister, had complained that concerns about the health of Spain’s banking system had spilled over onto Italy as well, unfairly pushing up Italian borrowing costs.

With the temporary bailout fund left with 240 billion euros and the 500 billion-euro permanent fund on hold, European resources would be swamped by Italy’s 2 trillion-euro debt. Monti stopped short of seeking official intervention.

The only official bond buying during the crisis has been by the ECB, which suspended its interventions in February after criticism from Germans on its policy council. The central bank now holds 212 billion euros of peripheral-country bonds.

Bond Buying

Italy wants an arrangement “by buying bonds issued by a certain country in order to contain the fluctuations in the spread,” Monti told reporters after the meeting.

Finance ministers fleshed out the terms for fixing Spanish banks, which are sitting on about 180 billion euros of troubled assets linked to the real-estate industry as a property slump enters its fifth year. A final accord will come on July 20.

In a separate concession, the euro ministers gave Spanish Prime Minister Mariano Rajoy’s government an extra year, until 2014, to drive the budget deficit below the EU limit of 3 percent of gross domestic product.

While the loans to Spain will go via the government’s FROB bank-restructuring agency, the aim is to convert them into direct injections once the setup of a single European bank supervisor makes that approach feasible, Luxembourg Prime Minister Jean-Claude Juncker said.

Political hurdles abound to switching to direct aid, which would give European authorities control over the banks instead of saddling the Spanish government with the debts.

French Argument

“We’ll argue for the retroactivity,” French Finance Minister Pierre Moscovici said. German Finance Minister Wolfgang Schaeuble said the Spanish government would be liable initially and didn’t address the issue of eventually converting the loans into direct aid.

In any event, the future permanent aid fund, the European Stability Mechanism, wouldn’t gain the power to administer direct recapitalizations until the euro area replaces the patchwork of national bank supervisors with a central authority.

Euro officials continued to spar over the timetable for the setup of a single supervisor. ECB Vice President Vitor Constancio told the ministers that a year-end target is “a commitment that will be very important for all sorts of reasons to complete in time.”

Other officials called the second half of 2013 more likely. Germany’s Schaeuble said “it will take time, it’s complicated, it isn’t easy to do.” First proposals are due from the European Commission in September.

German Court

Policies to shore up banks and calm bond markets are tied up with the start of the permanent ESM fund. Instead of going into operation today, it was delayed by a German high-court challenge that laid bare the fragile support in northern countries for further aid to the south.

In a hearing today in Karlsruhe, Germany’s Federal Constitutional Court heard complaints by plaintiffs including the 23,000-strong “More Democracy” group which said that “parliaments are being disempowered” by German loans to weaker economies.

The head of the German central bank, Jens Weidmann, offered ammunition to opponents by telling the court that warnings about the impact of a delay are “highly speculative” and “speedy ratification wouldn’t offer a guarantee against the crisis getting worse again.”

No date is set for a court ruling.

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