BRUSSELS: Spain has conceded it may need a state bailout and policymakers are considering writing down Greek debt to their
central banks, European officials said on Friday, as markets anticipated radical new action to pull the continent out of its debt maelstrom.
European Central Bank (ECB) President Mario Draghi, who on Thursday pledged to do whatever was necessary to protect the Euro Zone from collapse, is also set to meet Germany’s Bundesbank President Jens Weidmann to discuss a raft of other measures to address the region’s crisis, according to a Bloomberg report. Citing two central bank officials, the report said Draghi’s proposal involves Europe’s rescue funds buying govern-ment bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record low interest rates.
Weidmann poses the biggest obstacle to any ECB plan to buy government bonds, and Draghi would need to win
him over. A Bundesbank spokesman said meetings between the two men are not unusual; they take place if there is something that needs to be discussed.
The Bloomberg report also said Draghi favoured granting a banking licence to the Euro Zone’s planned permanent bail-out fund, the European Stability Mechanism (ESM), which would allow it to borrow money and deploy more fire-power if called upon to rescue an economy as big as Spain’s.
The crisis in the Euro Zone has been thrown into higher gear by a surge in borrowing costs for Spain and by an acknowledgement by Brussels officials that Greece is too far off its targets to be saved by its second bailout package, agreed just five months ago.
Spain, the next country in firing line, is far larger than the four other countries that have accepted European Union (EU) bailouts, and rescuing it would require action on a scale yet unforeseen. It may be a price that needs paying to save the single currency, analysts say.
Madrid has already accepted a lifeline for its banks while insisting publicly that it does not need a rescue for its state finances. But with its
borrowing costs breaching levels that forced Greece, Portugal, Ireland and Cyprus to seek bailouts, it could have
little choice but to seek emergency financing.
Asked about the European source’s comments, a Spanish government spokeswoman said: “We strongly deny any such plan. This possibility (of a 300-billion-euro rescue for Spain) has not been looked at and has not been discussed.” News that policy makers
were considering having central banks write off some of their Greek debt was another sign of radical measures contemplated behind the scenes.Private sector holders of Greek debt already wrote off most of the value of their holdings this year in history’s biggest sovereign debt
restructuring, agreed alongside a 130 billion euro second package of EU, International Monetary Fund (IMF) and ECB loans to rescue Athens.
But officials said there was now a recognition that Greece remains too far off its reform targets to pull itself out of the crisis while its
economy, in its fifth year of recession, shrinks ever faster, eroding its ability to pay its debts.
Markets remained focused on the prospect of intervention by the ECB. French newspaper Le Monde reported that the ECB and Euro Zone governments were preparing co-ordinated action to cut Spanish and Italian borrowing costs. European shares extended gains to trade about one per cent higher after the report’s release.
The Euro Zone’s two most powerful politicians, German Chancellor Angela Merkel and French President Francois Hollande, spoke on the phone and issued a joint statement. Echoing Draghi’s pledge on Thursday, they said they were determined to do everything to protect the Euro Zone.
But Germany’s Bundesbank pushed back, saying purchases of bonds by ECB to reduce borrowing costs of governments would be problematic. Germany regards measures such as potentially allowing ECB to finance state spending as against European law. The Bundesbank regards central bank purchases of sovereign debt as monetary financing of governments, which the ECB is barred from doing by European law. The German national central bank’s resistance could narrow ECB’s options. The Bundesbank saw the possibility of
EFSF bailout buying government bonds as less problematic, he added.