Spain, Ireland, ESM fund in focus at euro zone talks

NICOSIA: Euro zone finance ministers will discuss on Friday if Spain
should ask for financial support after the announcement of the European Central Bank's new bond-buying program brought Madrid's borrowing costs sharply lower.
For
the first time since the start of the year the ministers' talks will
take place at a time when market pressure for immediate action to solve
the euro zone sovereign debt crisis is easing, rather than mounting.
ECB's
announcement last week that it could buy unlimited amounts of Spanish
bonds, should it apply for help from the euro zone bailout fund,
brought Spanish 10-year bond yields down from 7.64 percent on July 24
to 5.62 percent on Thursday.
Yields of Italy, under similar
market pressure since the start of the year, fell from 6.6 percent on
July 24 to 5.03 percent on Thursday.
But many policymakers
believe that for yields to fall lower, or even remain at these levels,
the ECB would have to show its promises are not empty.
The bank
can only do so if Spain makes a formal application for the euro zone to
buy its bonds at primary auctions and accept the reforms that such aid
would be conditional upon, freeing the ECB to intervene on the
secondary bond market.
Spain does not want to ask for financial help because Prime Minister Mariano Rajoy fears the political backlash at home, but he may eventually have no other choice.
"There
will be a discussion if they will ask for help or not. After the ECB
announcements there is bigger pressure on the Spaniards to apply," one
euro zone official said of the talks in Cyprus, itself a candidate for
a bailout.
He added Spain would prefer to apply together with
Italy, rather than alone, to dilute the negative impression of having
mismanaged its public finances.
But another euro zone official
said Spain, in its reluctance to seek help, may find an ally in
Germany, as long as bond yields remain stable.
"Berlin could be
willing to accept that Spain refrains from asking for euro zone/ECB
help if markets remain calm," the second official said.
"Berlin
finds it difficult to win parliamentary backing on funding for new aid
programs, so, paradoxically, they could even be on the same side of
Spain when the issue will be discussed," the second official said.
WHEN RATHER THAN IF
Several
euro zone officials speculated that a Spanish application could come in
early October, in time for the next meeting of euro zone finance
ministers on Oct 8.
This would be after the presentation of
Spain's 2013 budget and the recapitalization needs of its banking
sector, both due on September 28.
So far markets have calmed
after the German constitutional court cleared the way to set up the 500
billion euro permanent euro zone bailout fund ESM, pro-European parties
won elections in the Netherlands and the euro zone is moving towards a
banking union with the ECB as the single supervisor.
But third
euro zone official said Spain should have euro zone support ready when
international lenders present their report on Greece - the country
where the debt crisis started - in early October, because it will make
a grim reading and could upset markets, boosting Spanish and Italian
borrowing costs.
The euro zone has already set aside 100 billion
euros to help Spain recapitalize its banks, but the country may need
more aid beyond that because of large debts of its autonomous regions,
which now want central government help.
Proposals for a euro
zone banking union are also on the agenda as giving the ECB the powers
of a single euro zone bank supervisor would pave the way for the euro
zone's permanent bailout fund ESM to directly recapitalize Spain's
banks, lifting some of the debt burden off Spain's shoulders.
The ESM, the creation of which was cleared by Germany's constitutional court on Wednesday, could also help Ireland.
The
ministers will discuss Ireland's long-standing plea to ease the burden
on its public finances of some 31 billion euros in promissory notes
issued to save two banks from bankruptcy.
Interest payments on
the notes are weighing heavily on the budget of Ireland, which is
otherwise a euro zone showcase of a country sticking to agreed reforms
and recovering.
Most countries want the ESM to lend to
distressed sovereigns without charging a penalty margin, as the
temporary fund EFSF does now. But a small hard line group of northern
European states believes some margin is necessary to avoid moral hazard.
The
ministers will also discuss the European Commission's proposal for a
banking union under which the ECB would have supervisory powers, with
discussions focused on the scope of the ECB's responsibilities. -
Reuters