Submitted by Mark Hanna
Courtesy of MarketMontage. View original post here.
Earlier this morning ECB held rates steady (no surprise) but there was no kaboom in the press conference which many were hoping for. While all the focus today is on monetary actions (central banks) the crux of European issues are fiscal (government level). Hence this story by Reuters is probably far more important than anything Ben, Mario, Janet will be saying or promising to do. If accurate, it looks like Spain will get their way and get a rescue for their banks without the money going through their government and hence adding to their debt load. This also avoids ceding control of their fiscal operations to outside forces ala those who have been formally bailed out. Once again, Germany was pushed …and bent.
- A deal is in the works that would allow Spain to recapitalize its stricken banks with aid from its European partners but avoid the embarrassment of having to adopt new economic reforms imposed from the outside, German officials say.
- While Berlin remains firm in its rejection of Spain’s calls for Europe’s rescue funds to lend directly to its banks, the officials said that if Madrid put in a formal aid request, funds could flow without it submitting to the kind of strict reform program agreed for Greece, Portugal and Ireland. Instead, Spain would only have to agree to new conditions tied to the reform of its banking sector.
- Berlin is also exploring the possibility of funneling aid to Spain’s bank rescue fund FROB to reinforce the message that it is the country’s banks and not its public finances which are at the root of its problems. (as I stated in an earlier post Spain is most like Ireland in that it has had a huge property bust and has massive issues in its banks. Its public finances – while not stellar – are not at the levels of say a Greece or Portugal. Ireland chose to rescue its banks, which pushed its public finances over the edge – something Spain is trying to avoid.)
- With an IMF report on Spain’s banks looming next week, officials say all the pieces are in place to move within days on an aid deal for Madrid. A package is expected by early next month at the latest, after an external audit of the banking system. “One could imagine that conditionality would be focused mainly on the banks, because Spain has already tackled the other reforms,” a senior German government official said on condition of anonymity because of the sensitivity of the situation.
- Merkel has also sent the message that she is open to Europe-wide supervision of the banking sector, albeit as a “medium-term” goal, one element of a proposed “banking union” to break the vicious circle of interdependence between Europe’s financial institutions and its sovereigns. But she must tread carefully. Some of her political allies and leading conservative newspapers have come out strongly against other aspects of a banking reform, including the idea of a Europe-wide deposit guarantee scheme.
- German officials have quietly been pushing Spain to accept a bailout for weeks and Volker Kauder, the head of Merkel’s Christian Democrats (CDU) in parliament, became the most prominent politician to say so publicly on Wednesday.
- A senior French official who has been in contact with the Germans said negotiations were heating up and that there was a broad consensus now among member states on using the EFSF or ESM to help Spanish banks.
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