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Hollande Backs Spanish Call for Clarity on Bailout Terms

French President Francois Hollande
French President Francois Hollande said, “The countries that are in surplus should stimulate domestic demand with wage increases and lower taxes.” Photographer: Alessia Pierdomencio/Bloomberg

French President Francois Hollande backed Spain’s demand for clarity on the conditions it would face in return for financial support, underscoring a divide with Germany as European leaders prepare to gather in Brussels.

“Spain needs to know the precise conditions under which it would receive financial help,” Hollande said in an interview with six newspapers before the summit, which starts tomorrow. Chancellor Angela Merkel’s government believes that terms should be negotiated once a request is made, one of her officials told reporters in Berlin today.

By throwing his support behind Spanish Prime Minister Mariano Rajoy and calling for budgetary easing from countries that can afford it, Hollande is setting out a challenge for Merkel similar to the one he made at the last summit in June.

Since then, turmoil across the region’s bond markets has eased after the European Central Bank offered to buy the bonds of struggling governments and the euro area set up its 500-billion euro ($656 billion) permanent rescue fund.

The yield on Spain’s 10-year government bond today dropped 29 basis points to 5.51 percent at 2:45 p.m. Paris time after Moody’s Investors Service cited the ECB’s move as a reason to keep its investment grade credit rating on Spain. The yield climbed above 7.6 percent in July.

The rate on Italian debt fell 11 basis points to 4.82 percent and the euro rose to a one-month high of $1.3172.

Paying Dearly

Policy makers are now trying to prevent Spain from disrupting the calm that has descended on markets three years after the 17-nation euro bloc’s budget crisis first started. While Rajoy has said Spain won’t request aid until the terms are clearer, two German government officials said today it’s not possible at this moment to say what those conditions would be.

Hollande said in his interview that Spain, like Portugal, is “paying dearly” for the mistakes of others. He predicted that the worst of the sovereign debt crisis is over because speculation about a possible break-up of the single currency has abated.

Greece, which requires funding in coming weeks, should receive it without signing up to conditions beyond which Prime Minister Antonis Samaras has already committed it, according to the French president. He didn’t say whether the country should receive additional funding or more time to repay its debt.

Fiscal Stimulus

Echoing views aired by the International Monetary Fund last week in Tokyo, Hollande also said that euro countries should apply fiscal stimulus if they are in a position to do so. The comments point clearly to Germany, where Merkel is guiding Europe’s largest economy toward a balanced budget with the help of a persistent trade surplus.

“The countries that are in surplus should stimulate domestic demand with wage increases and lower taxes,” Hollande said. “That would be the best expression of solidarity” with the rest of the bloc.

Asked about his relationship with the German chancellor, Hollande said “no one can accuse Angela Merkel of being ambiguous.”

“She is very sensitive to domestic political questions and of the demands of parliament,” Hollande said. “I understand. We all are. We all have our public opinion, our democratic debates. But we share a common responsibility and have to act in the interest of Europe.”

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