A HUNDRED BILLION EUROS FOR SPANISH BANKS, by François Leclerc

Guest post. Translated from the French by Tim Gupwell.

It was no longer possible to carry on. Two and a half hours of videoconference between the Eurozone’s finance ministers (joined by Christine Lagarde on behalf of the IMF) were needed to finalize the scheme, allowing the German and Spanish governments to save face. Germany made sure that aid for the Spanish banks passed via the State, thus increasing Spain’s deficit, whilst Spain attempted to explain that this was not a bail-out plan or a loss of sovereignty, with, furthermore, the assistance not being subject to any austerity measures.

Up to a hundred billion Euros are going to be lent to FROB, the government’s banking support fund, on the condition that the government takes measures to stabilize its banking system. How this will work is yet to be defined. The IMF, which is not contributing financially to the rescue, will be entrusted with the task of ensuring it all goes smoothly.

Three questions are now being asked:

1. Will this banking rescue package ease bond-market rates, allowing the State and its regions to finance their debt on the markets on acceptable terms, so as to avoid the necessity of a second financial plan? In any event, this is what Wolfgang Schäuble hopes.

2. Ireland immediately asked to benefit from the same measures on a retrospective basis, namely a rescue package for banks unaccompanied by the austerity measures which it has had to consent to. Is this Spanish precedent not going to mark a milestone, in as much as it is a relaxation of the compensatory measures normally required?

3. Since the Spanish public debt is going to increase by the amount of the assistance provided to the banks, what new debt-reduction timetable will be fixed?

Before the videoconference Jens Weidmann, the president of the Deutsche Bundesbank, declared to the German newspaper Welt am Sonntag that Germany, even though it was profoundly attached to the Euro, would not accept all of Europe’s demands. This is another way of saying that further evolutions in the German position should not be counted upon, whilst recognizing that this one is possible within certain limits.

According to Der Spiegel it is likely that this will soon be put to the test. The gang of four composed of José Manuel Barroso, Jean-Claude Juncker, Herman Van Rompuy and Mario Draghi are reported to be putting the final touches to a new type of Eurobond project. According to its terms, each national government could only retain the possibility of deciding on its expenses if these were covered by their receipts. Any financial needs going beyond this would have to be submitted to the Euro group, which could decide whether or not to finance the project concerned by issuing Eurobonds. In order to give a minimum of democratic legitimacy to its decisions, the Euro group would be controlled by an organism containing elected representatives from the European Parliament.

Meanwhile Mario Monti has insisted that an package of measures dedicated to growth must imperatively be adopted during the next summit, before he receives François Hollande next Thursday and then organizes a meeting on the 22nd June with him, Angela Merkel and Mariano Rajoy. Returning to the subject of the banks, Christine Lagarde has even gone so far as to advocate state involvement in banks’ capital where necessary, and the adoption of a plan which includes more unified bank supervision, the creation of a banking authority and a single European deposit insurance fund.

All these propositions contradict the line defended by Angela Merkel, and further light is thrown on them by the agency Moody’s latest press release: “Were Greece to leave the Euro, posing a threat to the Euro’s continuing existence, we would need to review all euro-area sovereign ratings, including those of the AAA nations”. In this way, the German government has been directly and symbolically targeted.

In a week’s time, Greece will vote again, having benefitted from 347 billion Euros of aid in the form of loans and debt cancellation without any of the problems being solved. Nobody knows who, out of New Democracy or Syriza, will emerge victorious and what kind of negotiations will need to be entered into – unless the country moves rapidly towards a default on its payments. Nobody in Europe knows what consequences will ensue as a result, some seem confident, others afraid. It is possible to make such a bet?

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