Spanish Economy Minister Luis de Guindos is pushing for additional budget cuts after Germany signaled to him that such a move would be rewarded by bond market assistance, according to two people in Madrid familiar with his thinking.
De Guindos wants further cuts in health and education spending after his German counterpart, Wolfgang Schaeuble, told him that such a move would enable Germany to support any steps by the European Central Bank to push down Spanish borrowing costs, said the people, who discussed the proposal with the economy minister. They asked not to be named as the discussions were confidential. ECB President Mario Draghi also backs de Guindos’s push, said one of the people.
A spokeswoman for the ECB declined to comment. A spokeswoman for de Guindos said Spain is planning no more cuts and hasn’t been asked to make any. The German Finance Ministry referred to a joint statement published after Schaeuble hosted de Guindos in Berlin on July 24 in which he said bond yields don’t “correspond to the fundamentals of the Spanish economy.”
The past month has seen some evidence of a rapprochement between northern and southern euro members with Schaeuble voicing his support for Spain’s austerity drive after Prime Minister Mariano Rajoy unveiled a fourth package of cuts since taking office in December. Italian Prime Minister Mario Monti held talks with Finnish officials in Helsinki today after he met with French President Francois Hollande in Paris yesterday.
The yield on Spanish 10-year bonds dropped more than 100 basis points since reaching a euro-era record last week as Draghi signaled the ECB is preparing action to help. The ECB next meets tomorrow to review policy.
“At face value this is encouraging with regard to the ECB being able to resume its bond purchases as soon as this week,” Ken Wattret, chief European economist at BNP Paribas in London, said of de Guindos in a telephone interview. “But there is still some uncertainty as to how political developments and ECB unconventional measures will fit together.”
Spanish bonds rose today, sending 10-year yields down 8 basis points to 6.67 percent at 2:27 p.m. in Madrid. Italy’s 10-year yield fell 13 basis points to 5.95 percent. The euro was little changed.
Investors are for now looking to Draghi to explain how he will back up his July 26 pledge to do “whatever it takes” to protect the 13-year-old currency union.
De Guindos, who sees Schaeuble regularly at meetings of European finance ministers, sought out his German counterpart after 65 billion euros ($80 billion) of spending cuts and tax increases announced July 11 failed to stem a sell-off in Spanish government bonds.
One of the people who discussed the agreement with de Guindos said that Spain will also have to cut pension entitlements, impose long-term spending controls and meet the budget deficit targets set by the EU to retain German support.
De Guindos’s plans will probably face resistance from Spain’s regional leaders already balking at having to administer the harshest spending cuts in the country’s democratic history. Leaders in Catalonia, the biggest contributor to Spain’s economy, boycotted a meeting with Budget Minister Cristobal Montoro in Madrid yesterday, when they were meant to discuss progress on implementing cuts in the existing program.