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Spanish bailout - what type of ESM´s credit line is available and is Germany pushing for a delay?

Spanish bailout - what type of ESM´s credit line is available and is Germany pushing for a delay?

17.10.2012 9:27

Spain´s turnaround on a bailout is a positive development that things are moving rapidly in the right direction. The fact that they would be willing to sign a Memorandum of Understanding is a major step forward. Even though, this MoU will likely consist of the measures already announced by Rajoy for the 2013 budget and for the restructuring of the economy (in line with EU recommendations). This is merely to avoid suffering a loss of face from his grassroots support. The articles specifically mentioned that there would be no additional reform measures.

Moreover, let´s a look at the shape of the requested funds. The official said that Spain wants to secure “a credit line” with the ESM, which they would only use if necessary. The ESM has three types of credit lines available: PCCL, ECCL and ECCL+. Only the first one (PCCL; Precautionary conditioned credit line) can be drawn under a loan OR primary market purchases and thus fits with the Spanish desires (having a backstop, but not the loan). Another feature of a PCCL is that is based exclusively on pre-established conditions. In other words, they won’t fall under Troika reviews afterwards once they applied for a programme unless they effectively have to draw funds from the PCCL. The main purpose of the Spanish application would be to initiate ECB bond buying, but that’s where the shoe pinches. When the ECB announced the technical features of its OMT programme, it explicitly mentioned under the “conditionality” paragraph: “A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.”. The ECB thus only wants to commit when there is also conditionality afterwards (ECCL)., not only in advance (PCCL). We’d like to add that German CDU lawmakers Barthle and Meister yesterday said that a PCCL was possible for Spain (although downplayed afterwards). We clearly didn’t reach the end of this debate yet, but we stress once again that things seem to be moving in the direction of an aid request.

Finally, the source indicated that the origin why a request is currently delayed, was opposition from other EMU countries. The article mentions the fallout on Italy. This seems to us a rather strange declaration as the establishment of the current firewall (ESM/ECB/EU policy), served to erase all contagion fears. What is more likely, is that Germany is pushing for a delay so that it can bundle the solutions for Spain, Greece (and Cyprus?) and Chancellor Merkel only has to face the Bundestag once to get approval for all programmes.

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