The International Monetary Fund called on the eve of a European Union summit for both Spain and Italy to seek eurozone assistance to draw a line under the bloc’s debt crisis, but Rome has rebuffed the idea and Madrid seems likely to apply alone.
The two-day Brussels summit will debate steps towards a single banking supervisor and proposals for closer eurozone integration, including German Finance Minister Wolfgang Schaeuble’s idea of a super-commissioner with veto powers over national budgets.
No decisions are expected this week and there is no certainty as to when Spain will come off the fence.
Spain dodged a bullet on Tuesday when Moody’s maintained its credit rating at investment grade, with a negative outlook, on the assumption that Madrid will trigger European Central Bank intervention soon to lower its borrowing costs.
Spanish and Italian bond yields fell in response, while the euro strengthened to a one-month high against the dollar.
IMF chief economist Olivier Blanchard told an Italian daily that the euro area was close to having all necessary measures in place to ensure Spain and Italy can keep borrowing in the markets while they implement painful economic reforms.
“In the short-term it would be crucial to have a plan for the two countries of the (eurozone) periphery,” Blanchard told Il Corriere della Sera in an interview published yesterday. “This would include not only an ongoing process of adjustment inside the countries but also a guarantee they can fund themselves. This would be conditional on them sticking to their commitments,” he said.
Senior Spanish and eurozone sources have indicated Madrid is preparing to request a precautionary credit line from the eurozone rescue fund in the coming weeks – a move that could start ECB bond-buying once Spain agreed on policy conditions.
Italian Prime Minister Mario Monti said last week a Spanish request could be enough to calm markets. He has repeatedly said Rome does not need assistance for itself.
Resistance from EU paymaster Germany to a credit line for Spain is waning, sources in contact with top German policymakers said, although any decision is likely to come at the earliest at a November 12 finance ministers’ meeting and perhaps later. By then, EU and IMF officials should have completed a report on Greece’s compliance with its second international bailout, paving the way for an urgently needed €31 billion aid tranche to keep Athens afloat.
The longer-term outlook for Greece remains clouded, with German leaders rejecting any write-down of its debt to official lenders or any additional eurozone funding while softening to the idea of giving Athens more time to meet its fiscal targets.
Spain has said it should have to meet no new conditions to receive a credit line, seen at around €50 billion, since it is fulfilling all the EU’s policy recommendations for deficit-cutting and economic reforms.
However, a senior eurozone source said Madrid might be asked to reform its pensions system and break the link with inflation, which economists say is an unsustainable fiscal burden.