Eurozone ministers struggled to reassure financial markets yesterday that an aid package for Spain they outlined overnight would help stabilize the currency bloc — a task made all the harder by a German legal challenge to its crisis-fighting tools.
The ministers agreed early yesterday to grant Madrid an extra year until 2014 to reach its deficit reduction targets in exchange for further budget savings. They also set the parameters of an aid package for Spain’s ailing banks.
The decisions were aimed at preventing the eurozone’s fourth-largest economy from needing a full state bailout which would stretch the limits of Europe’s rescue fund and plunge it deeper into a debt crisis.
“There’s no emergency here, there’s a clear path towards stabilization,” Luxembourg Finance Minister Luc Frieden said of the measures agreed for Spain. “The markets have to realize that the money is there, more money than is necessary.”
However, markets were disappointed the meeting did not offer more. The euro initially traded near a two-year low against the US dollar and hit a five-week low versus the yen, with sentiment edgy as the focus shifted to a German court hearing.
Germany’s top court was to pick up the issue yesterday about whether Europe’s new bailout fund and budget rules are compatible with national law in a process influencing not just how to tackle the eurozone crisis, but how much deeper European integration can go. The hearing into complaints about the fund, the European Stability Mechanism (ESM), and fiscal pact may indicate how long the court will keep Europe on tenterhooks.
Anything more than a few weeks would mean a serious delay to implementing the ESM, which has already been postponed from July 1, and raise serious doubts about whether Europe will really get the extra firepower it needs to combat the crisis.
“A considerable postponement of the ESM which was foreseen for July this year could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the eurozone’s ability to make necessary decisions in an appropriate timeframe,” German Finance Minister Wolfgang Schaeuble told the court.
At their meeting overnight, euro zone finance ministers did not agree a final figure for aid to ailing Spanish lenders, weighed down by bad debts caused by a housing crash and recession, but the EU has set a maximum of 100 billion euros (US$123 billion) and about 30 billion euros would be available by the end of this month if there was an urgent need.
A final loan agreement will be signed on or about July 20, Eurogroup chairman Jean-Claude Juncker told a news conference.
Frieden, arriving for yesterday’s meeting of EU finance ministers, said the 100 billion euros available to Spanish banks was much more than they needed.
In one key decision watched by investors, ministers agreed overnight that once a single European banking supervisor is set up next year, Spanish banks could be directly recapitalized from the eurozone rescue fund without requiring a state guarantee. That fulfils an EU summit mandate to try to break a so-called “doom loop” of mutual dependency between weak banks and over indebted sovereigns, but represented a climbdown for hardline north European creditor countries.