Spain will be given an extra year to get its deficit reduction under control, but markets were not impressed with the action taken by eurozone ministers in a Monday meeting that stretched into Tuesday.
Reuters reported Tuesday that the 9-hour discussion of the terms of a Spanish bailout lasted till the wee hours of Tuesday, with the upshot that Spain will be given a 2013 deadline to reach deficit reduction targets. However, markets were unimpressed, particularly since on Tuesday the German high court would take up a legal challenge to the methods planned for the European Stability Mechanism (ESM) to make it possible to bypass governments and bail out banks directly.
Up to 100 billion euros ($123 billion) in emergency loans will be granted to keep Spain’s banks afloat. The costs may be removed from the Spanish government’s balance sheet so that Spain does not fall victim to the debt crisis like its predecessors Ireland, Portugal and Greece.
In a Bloomberg report, Prime Minister Jean-Claude Juncker of Luxembourg said of the Spanish measures that the first injection of funds will “be mobilized as a contingency in case of urgent needs in the Spanish banking sector.” He added that the planned action “will succeed in addressing the remaining weakness in the Spanish banking sector.”
Finance Minister Luc Frieden of Luxembourg was quoted regarding the action taken on Spain, “There’s no emergency here, there’s a clear path towards stabilization. The markets have to realize that the money is there, more money than is necessary.”
But if a German challenge is successful, it could tie that money up. In the report, Finance Minister Wolfgang Schaeuble of Germany said to the court, “A considerable postponement of the ESM (bailout fund) which was foreseen for July this year could cause considerable further uncertainty on markets beyond Germany and a considerable loss of trust in the eurozone’s ability to make necessary decisions in an appropriate timeframe.”
The ESM was supposed to go into action on July 1, but it is still in limbo—thanks in part to the German court action and also to delays in an Italian ratification of the pact governing its use. Ewald Nowotny, who is Austria’s representative on the ECB council, said in the report, “This ESM today should be in action, and it is not and we do not know when it will be in action. This is of course something that tends to undermine the credibility of the decisions that we take at summits.”