Portugal Is Given a Sip of Breath, Spain Is Under Pressure
Ralitsa Kovacheva, 16 September 2012
The permanent bailout fund for the eurozone - the European Stability Mechanism (ESM) - will formally start working on October 8, when the first meeting of its Board of Governors will be held, the fund’s head Klaus Regling said. By the end of the month the fund will be fully prepared to finance possible new rescue operations, it became clear after the informal meeting of the Eurogroup (eurozone finance ministers) in Nicosia.
The ministers discussed the decision of the German Constitutional Court on the ESM. We all agreed that no provision of the treaty may be interpreted as leading to higher payment obligations for ESM members without prior agreements of their representative and that the treaty provisions do not prevent comprehensive information of the national parliaments, Eurogroup President Jean-Claude Juncker stated. These were the two conditions set by the court to allow Berlin to ratify the ESM. In the coming days ministers will come up with a special statement on the issue, allowing Germany to complete the ratification process, Juncker said.
Spain will meet its fiscal targets for 2012
and by the end of September Madrid will present a national programme of structural reforms, Spanish Economy Minister Luis de Guindos told his colleagues. Journalists rightly suspected that this may be a sign that the country is preparing to ask for rescue aid in the form of buying of Spanish debt by the ECB. As euinside wrote, one of the conditions is Spain to submit a formal application to its partners in the eurozone and to sign a macroeconomic programme with the bailout fund, subject to strict conditionality. Earlier this week, however, Spanish Prime Minister Mariano Rajoy reacted sharply on the matter saying he would not allow the EU or ECB to dictate him what costs he had to cut as a condition for buying Spanish debt. Perhaps because of those comments of Mr Rajoy's, asked to elaborate on the Spanish reform programme Jean-Claude Juncker said: "It is certainly not for us to describe least of all to the press what we think Spain should do or is likely to implement."
EU Economic and Monetary Affairs Commissioner Olli Rehn added, however, that the reform programme of the Spanish government would be based on recommendations made by the European Commission. Rehn added that by the end of September the results of the stress tests of Spanish banks would be ready and the financial needs of each institution would be clear. The money for the Spanish banking sector has already been provided for after the Eurogroup approved financial aid of up to 100 billion euro. However, speculations about whether Madrid would demand a state bailout or an ECB intervention, too, continue not only because of Spain's refusal to accept additional macroeconomic conditions but also because of contradictory attitude of its eurozone partners. While France is pressing Madrid to ask for help to reassure investors, Germany is rather sceptical because the government is not sure if it could get parliamentary support for another rescue programme.
Like Spain, Portugal will be given an additional year
to reduce its budget deficit below the limit of 3% of GDP. An agreement on that has been reached between the Portuguese authorities and the mission of the Troika (the European Commission, the European Central Bank and the International Monetary Fund), which recently completed its work in Lisbon. While the decision on the adjustment of the Portuguese programme still has not been formally adopted (for technical reasons), it has received the approval of eurozone finance ministers, Jean-Claude Juncker explained. The reasons for the extension of time are reduced budget revenues, as well as the strong pressure on the social security budget as a result of the large increase in unemployment and lower social security contributions.
A Portuguese journalist asked the Eurogroup President to comment on the political situation in the country after the Socialist Party refused to support the next budget because of the envisaged tax measures in it. Although the centre-right ruling coalition has a majority in Parliament to push the budget, the Socialists' decision poses a threat to the political consensus on the country's rescue programme, which is often given as an example by Brussels. Jean-Claude Juncker, however, replied in his typical style: "I am never commenting the internal political developments in a member state. I have sufficient imagination to do it but I have sufficient imagination to know that if I would use all my imagination I would need more imagination to come out of the situation I’ve put myself in."
But despite the problems with achieving its fiscal targets, Portugal was again pointed as an example for implementing its rescue programme, as well as Ireland. IMF chief Christine Lagarde defined both countries as "success stories" of the eurozone. None of the officials, however, took the risk to answer the question
whether Ireland would be relieved from its debt burden,
as the EU leaders promised in June when they approved the new functions of the eurozone bailout fund. Currently, intensive negotiations are taking place between the Irish authorities, the European Commission, the European Central Bank and the International Monetary Fund aimed at, according to Juncker, "a possible improvement" of the Irish rescue programme.
The country is trying to negotiate a restructuring of the enormous bank debt, which has been taken over by the state. If successful, this would mean a reduction of the public debt by 31 billion euros. IMF chief Christine Lagarde said it was "important" to support Ireland. The country has already made a successful attempt to return to the financial markets, moreover - much earlier than envisaged. German Finance Minister Wolfgang Schaeuble, however, said some time ago that he would oppose any debt-relief plan for Ireland if it would cause uncertainty on the financial markets and loss of trust.
Greece keeps negotiating with the Troika
on how to fill the fiscal gaps through both spending cuts and revenue increase. Ms Lagarde said there had been some progress but it was too early to make assessments. Asked whether Athens could hope to be given a two-year extension to implement the measures stipulated in its rescue programme and how this extra time would be financed, Ms Lagarde replied surprisingly favourably: "The target, when it comes to achieving debt sustainability, is very high so there are various ways to adjust, time is one that needs to be considered as an option." According to Eurogroup President Jean-Claude Juncker, a political decision on Greece can be expected not before the second half of October.