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.

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

Foto: Daniel Ochoa de Olza/ AP

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