It is being reported that the EU authorities are working behind the scenes to pave the way for a new Spanish rescue program, with unlimited bond buying by the European Central Bank, by helping Madrid craft an economic reform program that will be unveiled next Thursday.
Talks between the Spanish government and the European Commission are focusing on measures that would be demanded by international lenders as part of a new rescue program, ensuring they are in place before any bailout is formally requested.
It is reported that negotiations have been conducted directly with Luis de Guindos, the Spanish finance minister. The reform plan, due to be unveiled next Thursday, will focus on structural reforms to the Spanish economy requested by Brussels, rather than on new taxes and spending cuts.
However, that does not mean that new austerity measures and spending cuts will not also be requested by the EU to meet existing EU budget targets, which Madrid is expected to miss.
Spanish officials have been trying for months to secure EU assistance without significant strings attached, but have made little progress on that front.
Prime Minister Mariano Rajoy has been reluctant to request the European Stability Mechanism (ESM – the eurozone’s 500 billion euro rescue fund), to begin buying Spanish sovereign bonds because he fears that EU monitors would, quite rightly, demand tough conditions in return.
Pressure on Prime Minister Rajoy is mounting. Earlier this month the European Central Bank president, Mario Draghi, announced that the central bank’s new bond-buying program would only be triggered after governments request help from the ESM and agree to reform plans with eurozone lenders. Bond buying by both the ESM and ECB would lower Spanish borrowing costs, easing Madrid’s debt burden.
Spanish officials have apparently been discussing whether they could use some of the bank rescue funds to buy Spanish sovereign debt, basically getting bailout money through the back door. Although theoretically Spain would not be permitted to redirect financial aid, it could still happen as using surplus bank bailout money would not require the approval of its EU partners. It would, of course, upset its partners no end.