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A New Dispute over Euro Rescue Fund: Spain Wants Billions For its Banks

A number of euro zone countries and senior officials at the European Central Bank would like to see the euro bailout fund changed so that it can provide direct aid to banks. This could help Spain, which has emerged in recent days as a new center of the euro crisis, but Germany is opposed.

The stock market in Madrid: The Spanish government is having trouble attracting private financing. Zoom
AP

The stock market in Madrid: The Spanish government is having trouble attracting private financing.

With an eye on the growing banking crisis in southern Europe, particularly in Spain, an increasing number of goverments as well as senior represenatives of the European Central Bank are pleading for the European Union's temporary euro backstop fund to be used to provide financial institutions with direct assistance.

Sources familiar with the discussions told the Süddeutsche Zeitung that the parties would like to see the criteria used by the European Financial Stability Facility (EFSF) to allocate aid be relaxed to include financial institutions in the event they represent a greater problem than a country's government finances. So far, this aid has been paid to governments, which in turn provided some forms of assistance to beleagured banks.

Such a move would enable the temporary euro-zone rescue fund, the European Financial Stability Facility (EFSF), to directly transfer money to these banks, bypassing national governments.

Süddeutsche reports that the primary supporter for the calls is the Spanish government of Prime Minister Mariano Rajoy, which is having increasing difficulty raising money on the markets to fill the country's budget shortfall. Relaxing the rules could help ease the burden of the banking crisis his government faces and it would enable Spain's comparably low debt-to-GDP ratio to remain constant. In addition, it would mean that his country wouldn't be forced to implement strict savings and reform measures that are stipulated by the rescue fund in exchange for aid. As some observers have noted, austerity measures appear to be contributing to Spain's slide into recession.

Germany Rejects Bank Support

Some senior representatives of the European Central Bank are also backing the proposal because it would mean that the ECB would no longer be alone in its efforts to stabilize the European banking sector. In recent months, the ECB has lent commercial banks a total of more than €1 trillion in cheap money in an effort to stop a credit crunch last seen after the collapse of the Lehman Brothers investment bank in 2008.

But it would also entail a number of losers -- namely the most important EFSF donor countries, led by Germany, because they would no longer be able to force countries obtaining the aid to push through reforms. In the event of a bank's collapse, the money those countries had lent would also be lost.

In Berlin, German officials have firmly rejected the proposal. "Spain doesn't need an aid program, and if it were to need one, then only under the known conditions," a government source told the newspaper.

Finance Minister Wolfgang Schäuble, for his part, has said he believes that Spain, Italy and Europe as a whole are headed down the right path in the financial crisis. But the government source speaking to the Süddeutsche pointed out another hitch: A direct payment of EFSF funds to private banks is not permissible under current legal provisions.

kla -- with wire reports

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1. It is easier to print money than to hold its value
Inglenda2 04/18/2012
It is quite understandable that Spain would also like the German taxpayer to rescue its banks. It was after all the German government which - through the back door – saved the USA from complete ruin. By pouring taxpayers money into German banks which were holding worthless American investment papers, commercial institutions on both sides of the Atlantic were saved. The price for this action can be seen now, not only when filling up at the petrol station, but also in the new record debts of the government itself. The Euro has been designedly damaged and devalued without any honest publication of this fact. With Spain Wanting Billions for its Banks and a number of Euro zone countries and senior officials at the European Central Bank wishing to see the Euro bailout fund changed so that it can provide direct aid to banks, German leaders are at last beginning to wake up. The new Dispute over the Euro Rescue Fund and the fear German politicians have about explaining to their electorate why it is only the Germans who are paying while everybody else holds out their hands is also comprehensible. On the one side there are those, who do not understand why Germany is able to help foreign countries all over the globe, but not its neighbours. On the other a country which, despite its extremely strong industrial and trading successes, has begun to realise friends that cannot be bought and that it is possibly more sensible, to let foreign banks solve their own problems than to risk state bankruptcy.
2. Semana Santa
tnt_ynot 04/19/2012
Spain will need every peseta it can scronge together for its banks. You have to see the unending ruins of the countries housing boom-bust to get a deep chill in your wallet and that is only the tip of the iceberg. Under the surface are all the inhabited and about to be uninhabited homes whose homeowners are underwater in debt. Their equity value to debt owed is massively negative. USA de javu. In Autumn the Pain in Spain will become insane and then it is bailout time as described at :http://euro-meltdown.blogspot.com Anthony CARAMBA
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