Spain's cost of borrowing breaks 7% and may force eurozone governments to make hard decisions quicker than expected
Eurozone governments' hopes of putting off any hard decisions on bailouts until after the summer holidays came under strong pressure today as Spain's cost of borrowing broke through the 7% threshold despite provisional agreement on €100bn in European rescue funds.
The Eurogroup, finance ministers from the 17 single currency countries plus officials from the European Commission, meet in Brussels on Monday evening to try to put flesh on the bones of an EU summit deal, hailed as a breakthrough at the time, 10 days ago that brought only a short respite for the embattled Spanish prime minister, Mariano Rajoy.
The summit resolved to break the invidious link between failing banks and weak sovereigns by agreeing to use eurozone bailout funds to recapitalise banks directly and not via governments, to avoid pushing up debt levels. But since the summit, creditor eurozone governments have backtracked on the pledges amid furious debate and rancour over what was actually agreed and how the accord will be implemented.
While the Germans and other north Europeans insist that direct bank injections can only be contemplated once a new regime of eurozone banking supervision is in place (likely to take a year), senior Eurogroup officials signalled that even in the event of bailout funds going straight to banks, the host country would still be burdened.
Were the main bailout fund, the European stability mechanism (ESM), to take equity in troubled banks, the host government would need to underwrite the risk and be liable if the bank went bust, the officials involved in preparing Monday's meeting said.
"The ESM is able to take an equity share in a bank but only against full sovereign guarantees. It remains the risk of the sovereign. There's some degree of mystification going on here," said a senior official.
With officials from the so-called troika of European commission, European Central Bank (ECB), and International Monetary Fund (IMF) currently scrutinising the needs and performance of Greece, Cyprus, and Spain, the senior official added that it would be the end of August before any concrete decisions were taken on Greece and Cyprus. Despite speculation that Slovenia could become the sixth of 17 eurozone countries to require a bailout, the official said there was little need to worry about Ljubljana: "Slovenia is nowhere near the necessity for a programme."
Spain was already set to dominate Monday's session, but as the yield on Madrid's 10-year bonds soared over 7.1% on Monday morning, the Eurogroup's air of complacency following what was seen as an unusually productive summit looked misplaced.
The ministers are expected to try to reach a "political understanding" on a memorandum of understanding between the eurozone and Madrid to be finalised later this month. In Brussels there is talk of new emergency Eurogroup talks around 20 July or even an extraordinary summit. Or ministers could confer by video conference instead before the August holiday.
In what appeared to be a reference to Spain, Mario Draghi, the president of the ECB, said last week that bailout funds to banks would burden the host country only temporarily since the money would come off the books once the new banking supervisory regime was in place.
Eurogroup officials, however, cast doubt on whether Spain would benefit here, pointing out that the memorandum of understanding with Madrid was likely to extend only until 2014 and it could take that long for the new supervisory procedures to be implemented.
On Greece, the officials said "there would be no more disbursement" of eurozone bailout funds until the current troika mission was complete and had assessed how far Athens' austerity and structural
reform programmes had been blown off track by the political turbulence of the last three months.
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