European
ministers were set to grant Spain an extra year to reach its deficit targets in
exchange for further budget savings but remained far from pinning down details
of bank rescues and emergency bond-buying that are of greater concern to
markets.
On
Monday, a top European Central Bank policymaker said that 17-nation currency
area’s debt crisis was now more acute than the financial turmoil happened in
2008 that felled U.S. investment bank Lehman Brothers, as finance ministers of
the euro zone met in Brussels.
The
ECB Executive Board member Peter Praet told to a conference in Lisbon, “”The
euro zone crisis is now much more profound and more fundamental than at the
time of Lehman.”
Eurogroup
finance ministers were tasked with fleshing out a bare-bones agreement reached
by EU leaders at a summit last month on establishing a European banking
supervisor and using the bloc’s rescue funds to stabilize bond markets.
However, with differences persisting between north European countries such as
Finland and the Netherlands and southern states led by Italy and Spain, EU
officials said no breakthroughs were likely this week.
German
Finance Minister Wolfgang Schaeuble sought to defuse growing opposition at home
by saying it would take time to establish a European bank supervisor and only
once it was fully in place might ministers decide to allow direct
recapitalization of ailing banks by the euro zone’s rescue fund.
Schaeuble
said he expected ministers to agree on a timetable for up to 100 billion euros
($123 billion) in aid for debt-stricken Spanish lenders.
The
ministers did agree to nominate Luxembourg central bank chief Yves Mersch for a
seat on the ECB’s six-member executive board, which has been vacant since
Spain’s Jose Manuel Gonzalez-Paramo’s term ended in May.
A
wider gathering of EU finance chiefs on Tuesday is set to ease a deficit
reduction goal that has forced Madrid to make punishing cuts that are
exacerbating a recession.
Spanish
Economy Minister Luis de Guindos was to spell out to finance ministers his government’s
plan for a package of up to 30 billion euros over several years through
spending cuts and tax hikes that are due to be announced this Wednesday.
Furthermore,
Spanish and Italian borrowing costs continued to rise on Monday, with Spain’s
10-year bond topping the critical 7 percent level, and world shares fell with a
darkening global growth outlook and little prospect of early process on the
euro zone’s debt crisis.
A
source close to the Spanish government said 10 billion euros of cuts would come
this year and that the measures would include a hike in VAT sales tax, reduced
social security payments, reduced unemployment benefits and changes to
pension’s calculations.
In
return, the European Commission will propose easing Madrid’s deficit goal for this
year to 6.3 percent of economic output, 4.5 percent for 2013 and 2.8 percent
for 2014, officials said.
Based
from the drafts recommendation from the European countries to Spain, the new
targets may still prove difficult to reach, loosening its goals and demands the
country be subjected to three-monthly checks.
The
figures highlighted Spain’s dramatic fiscal slippage due to a worsening
recession. Madrid was originally meant to cut its budget shortfall to 4.4
percent this year. Prime Minister Mariano Rajoy unilaterally changed the target
to 5.8 percent in March before eventually accepting an agreed goal of 5.3
percent.
The
Commission will make the new proposal on Tuesday to the EU’s finance ministers,
who would have to agree for the targets to become binding, two officials told
Reuters.
Madrid
had been due to reduce its national deficit to 3 percent of gross domestic
product by the end of 2013. But a deep recession has put that beyond reach.
De
Guindos said he hoped to reach agreement on a memorandum of understanding on
the bank rescue on Monday, which would be followed on July 20 by a final loan
agreement. As part of that, Spain will create a single bad bank to house toxic
assets from its banking sector.
Spain
and Italy again stepped up pleas for European action to put a cap on their
borrowing costs.
“At
this moment the only institution that has enough money to act is the ECB,”
Spanish Foreign Minister Jose Manuel Garcia-Margallo said at a conference. “For
that reason, the ECB should intervene in markets; it should start massive
purchases of public debt so that speculators understand that they will lose
their bets against the euro.”
But
Bradley Associates quoted “ECB President Draghi told EU lawmakers the key to
restoring market confidence was for countries in difficulty to fully implement
promised structural reforms and stick to programmers agreed with Brussels and
international lenders, even if they caused “social tensions.”
He
left the door open to a possible further cut in interest rates after last
week’s 25 basis point cut to 0.75 percent but voiced concern that the ECB was
being expected to act “in areas which don’t seem to have a connection with
monetary policy’s traditional remit”.
