Business World

Monday 11 November 2019

Spain and Germany say they have not discussed ECB conditions

THE leaders of Spain and Germany said today they had not discussed conditions Madrid would have to accept to take advantage of a new European Central Bank bond-buying programme aimed at bringing relief to struggling euro zone members.

Spanish Prime Minister Mariano Rajoy and German ChancellorAngela Merkel met in Madrid while in Frankfurt ECB head Mario Draghi announced his bond-buying scheme and said it would come with "strict and effective" conditions for countries that take it.

Rajoy has said repeatedly he is open to seeking a sovereign bailout for Spain but first wants to analyse the terms set by the ECB. Cash-strapped Spanish regions are clamouring for billions of euros to meet debt payments, squeezing the central government's finances to the limit.

"When there is news I will tell you. I haven't had time to read Draghi's speech yet," R ajoy said when asked whether further aid for Spain had been discussed at the meeting.

He said he had not committed to any new reforms for Spainand had no intention to change Spain's pension system, which is an area where he has not cut spending.

Draghi said countries that want to sign up for the bond-buying programme must agree to conditions in a programme with the European rescue fund. The central bank chief also said the involvement of the International Monetary Fund would be sought in designing conditionality.

His securing ECB support for the programme, despiteBundesbank opposition, pushed down the yield on Spain's benchmark 10-year bond, which measures the perceived risk of investing in the country. It fell to 6.1 percent, its lowest level in four months.


Unlimited ECB bond-buying would go a long way to shoring up the euro zone but it can only take effect if a country likeSpain first seeks help from the rescue fund and accepts the strings that will be attached.

That would be a bitter pill for Rajoy to swallow.

"The disappointment comes from the fact that the conditionality remains," said Ion-Marc Valahu at Fund Manager Clairinvest in Geneva. "Nothing can be activated until countries such as Spain or Italy request a bailout."

With Spain's economy in recession and unemployment at a dismal 25 percent, Rajoy is resisting more austerity and reforms than he has already pledged to the European Union to meet deficit reduction targets, and to comply with terms of a bailout of up to 100 billion euros for the country's reeling banks.

Germany and Brussels are expected to push for conditions such as pension and tax reforms and a full monitoring programme of Spanish government finances with involvement of the IMF.

Rajoy has already passed budget cuts of some €100bn through the end of 2014, pushed through labour market reforms and raised taxes.

Merkel said Spain was on the right path but must continue to do its homework.

"In the end, all other measures, such as those that serve monetary stability, which is what we're talking about with reference to the ECB, cannot replace political actions. Therefore it is very important that we do our homework as politicians and do it so that markets regain confidence," she said.

Rajoy met last week with French President Francois Hollande, who nudged him to seek a full sovereign bailout soon.

But Rajoy told the French leader he did not want to sign a new set of conditions for a bailout, preferring to have an addendum on the existing Memorandum of Understanding for the banks' rescue which it negotiated in June.

Before the Rajoy-Merkel meeting Spain's borrowing costs dropped sharply at an auction of 3.5 billion euros in bonds, as investors anticipated Draghi's announcement.

As austerity measures have cut into Spain's schools and hospitals, anti-German sentiment has grown among Spaniards.

Before the German leader arrived downtown Madrid was strewn with small paper fliers reading "Merkel, go home," and a protest was planned for later in the evening outside the European Commission Representation near the centre of the capital.


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