Saturday, October 13, 2012

IMF Calls On Germany To Allow Spain Bailout

There is a lot of drama going on at the IMF meeting in Tokyo this week. It is about Spain. The whole world is calling upon Europe to end the drama and bail out Spain now. The IMF added its highly influential voice to the chorus yesterday, with Lagarde saying that "the ESM and the OMT need to be deployed.” The head of the IMF’s financial department said that "the European Stability Mechanism and the bond purchase program of the ECB must be perceived by markets as real, not virtual.” Strong words.

The financial media report that Merkel has advised Spain not to apply because she can’t get an aid package through her side of the parliament. FM Schauble’s mantra is that “Spain has not asked for aid”, which is a bit disingenuous.

The Spanish media are not silent about this story. El Pais reported that “opposition from the ranks makes neither Merkel nor Sch√§uble interested in an early request for help from the Spanish government.” The paper reports that Merkel has the votes on the opposition side, but not on her side, and she doesn’t want to legislate without her own coalition: “They want to avoid a new bitter debate about billions in disbursements to eurozone partners, given the tense previous votes on Spain, Greece and the German contribution to the ESM bailout mechanism.”

Dow Jones reports that a vote on the Spanish bailout could split Ms. Merkel's coalition ahead of German national elections in fall 2013. “A growing number of conservative backbenchers are opposed to further taxpayer aid for other euro members.”

So, Spain needs a rescue soon, the IMF and EU governments want the matter addressed urgently, but Merkel can’t or won’t introduce a bill. 

Spain is not going to admit that it needs a bailout but can’t get one. FM De Guindos denies that there is a problem: "The instrument is real, not virtual. Because it is real, it is ready to be used at any moment. It is available. It is available in October, in November, in December.” He reiterated the bromide Spain doesn’t need a bailout, and that it is perceived as a good credit by institutional investors: "There is a much more optimistic sentiment now than a few weeks ago. There is interest for Spain's public debt." What else is he supposed to say?

Given that this stand-off has the IMF worried, it’s fair to say that it’s not an imaginary problem. However, Europe will continue to subvene further billions to Spain through ECB-funded bank purchases of government bonds, so nothing will happen soon.

In fact, next week Spain is planning to sell EUR3-4 billion in new bonds (to its banks, presumably). This sale will coincide with the EU summit in Brussels, where poor Mrs. Merkel will undoubtedly be the subject of much attention. I would not be at all surprised if the EU leaders have trouble drafting a consensus communique, as they did last time. I don’t see Hollande, Monti and Rajoy settling for more eurospeak about solidarity. There could be some drama then too.

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