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Spain's Economy Minister Luis de Guindos (L) talks with his Luxembourg counterpart Jean-Claude Juncker (R) during a meeting of the Board of Governors of the European Stability Mechanism (ESM) ahead of an euro zone finance ministers meeting in Luxembourg on Oct. 8, 2012. REUTERS/Yves HermanYVES HERMAN/Reuters

Euro zone finance ministers launched their permanent €500-billion ($634-billion Canadian) bailout fund on Monday but said Spain, the country widely expected to be first to draw on it, was taking steps to overhaul its economy and did not need a bailout for now.

Arriving at a meeting in Luxembourg also set to discuss Greece and differences over how to recapitalize Europe's wobbly banks, German Finance Minister Wolfgang Schaeuble said Madrid had made clear it wanted no assistance.

"Spain needs no aid program. Spain is doing everything necessary, in fiscal policy, in structural reforms," he told reporters as he arrived for a gathering that will also discuss plans to establish a single supervisor for euro zone banks.

"Spain has a problem with its banks as a consequence of the real estate bubble of the past years," he said. "That's why Spain is getting (EU) help with banking recapitalization."

Luxembourg Finance Minister Luc Frieden took the same line but added that if Spain were to make a request for aid beyond the €100-billion already earmarked to recapitalize its banks, it would be examined.

As well as Spain's broad financial needs, Monday's meeting was expected to discuss the budget goals presented by Madrid last month, which the European Commission has yet to endorse.

The Commission will publish its twice-yearly economic forecasts on Nov. 7 and some officials have indicated that it may conclude Spain can't meet its budget targets, which are based on the economy contracting by just 0.5 per cent next year.

The IMF forecast of a 1.2 per cent recession may be revised further downward on Tuesday.

Evidence that Spain can't meet the targets it has set is likely to undermine market confidence and drive up Madrid's borrowing costs, which are currently hovering around a manageable 5.75 per cent. Yields on 10-year bonds above 6 per cent for a sustained period could force a request for help.

"I think we should deal with such a request when it comes, but so far the Spanish government is undertaking reforms which go in the right direction," Luxembourg's Mr. Frieden said.

Many in the financial markets are convinced Spain will not be able to meet its sovereign funding needs at an affordable cost without euro zone and European Central Bank support, especially with several regions requiring a bailout from Madrid.

As well as Spain, ministers will discuss the situation in Greece, where intense negotiations continue between the government and the 'troika' of inspectors from the Commission, the ECB and the IMF over budget cuts for 2013-2014.

Jean-Claude Juncker, the chairman of the euro group, said no developments were likely at least until the troika finishes a report on Athens' debt situation and whether it is survivable. That report is now expected in early November.

"I don't think that we will have any major decisions on Greece," Mr. Juncker said. Asked whether a decision on Greece could be expected soon, he replied: "Hope never dies."

Monday's meeting will also discuss plans for the ECB to be given responsibility for supervising all euro zone banks and the idea of creating a single budget for euro zone countries, issues that will be discussed further by euro zone and EU leaders at a summit in Brussels on Oct. 18-19.

One of the trickiest issues – when the ESM rescue mechanism should be allowed to directly recapitalize banks and how it would work in practice – looked set to be left aside, however.

At a summit on June 29, EU leaders agreed that the ESM should be permitted to pump capital into banks directly once a single supervisory mechanism under the ECB is in place, possibly as early as January next year.

But the Netherlands, Finland and Germany disagree on how to interpret the June 29th agreement, saying that direct bank recapitalization should only apply to future problems not "legacy" bad banking debts such as those in Ireland and Spain.

Under such circumstances, direct recapitalization would not help Madrid or Dublin since it would fail to break the link between indebted governments and their indebted banks.

EU leaders will now have to re-evaluate their June 29th agreement when they meet on Oct. 18-19. Most diplomats expect the original interpretation to stand, meaning the costs of a direct recapitalization of Spain's banks would not accrue to the government's books, but details remain to be fought over.

With the euro zone countries involved in a lengthy process of trying to define how best to overhaul the monetary union that binds them, meetings of finance ministers increasingly involve broad discussions rather than specific decision-taking.

However, the one firm action taken on Monday was the unveiling of the European Stability Mechanism (ESM), a €500-billion rescue mechanism for the 17 euro zone countries.

The ESM, which replaces the temporary EFSF, will be used to lend to distressed euro zone sovereigns in return for strict fiscal and structural reforms that aim to put economies that have lost investor trust back on track.

"The start of the ESM marks a historic milestone in shaping the future of the European monetary union," the fund's chief executive, Klaus Regling, told reporters "The euro area now is equipped with a permanent and effective firewall, which of course is a crucial component in our strategy to ensure financial stability in the euro zone."

The fund's lending capacity will be based on €80-billion of paid-in capital and €620-billion of callable capital, against which the ESM will borrow money on the market to lend it on to governments cut off from sustainable market funding.

From Monday it has a capacity of €200-billion. It will reach its full capacity gradually by 2014.