Home Germany and the ECB Want More Cuts in Spain Before
Forex News Today: Daily Trading News

Germany and the ECB Want More Cuts in Spain Before

According to two Spanish sources, Germany and the ECB offered to help Spain with lowering bond yields if the nation launches new cuts, especially in  health and education.  

Spain still hasn’t formally asked for aid. A Spanish aid request could be accompanied by a commitment to cut more. A commitment for more cuts could be seen without an official request, and be more honorable for Spain and will enable bypassing the bailout funds.

In both cases, this will be answered with a massive effort to lower Spain’s borrowing costs. Will a Spanish move make Draghi deliver and turn a corner in the debt crisis?

German finance minister Wolfgang Schäuble and his Spanish colleague  Luis de Guindos discussed it. TIn their recent meeting, both ministers agreed that Spain’s borrowing costs are unjustified.  The ECB and the Spanish finance ministry refused to comment on this, reports El Economista (original Spanish, Google Translated).

Spanish internal issues

Spain already denied that it was exploring a full bailout. Getting ECB help with German acceptance could bypass a bailout, and add to the legitimacy of the cuts in the eyes of the Spanish public.

It’s important to note that health and education are managed by the autonomous regions (“comunidades”). The central government can intervene in the regions, especially as they are shut out of money markets. However, this may cause tensions.

So, could we see a Spanish pledge for new cuts together with an announcement of bond buys by the ECB? Is a Spanish move a  prerequisite  for full QE? Is this the “condotionality” that was discussed in the past – conditionality that will satisfy the Germans?

This could be the ECB bailout of Spain, correcting mistakes of the past.

Last year, Draghi’s predecessor Trichet sent “recommendations” to both Italy and Spain. The then Italian PM Berlusconi quickly announced new measures, and the ECB bought Italian bonds. Berlusconi was later quick to retreat from his commitments.

It’s important to note that the German opposition to directly buying bonds and giving the ESM a banking license is tough. These are the main reasons that could cause a disappointment from Draghi.

However, this report about a Spanish move certainly provides hope that Draghi will deliver.

Further reading: EURUSD forecast.

Yohay Elam

Yohay Elam

Yohay Elam: Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I've accumulated. After taking a short course about forex. Like many forex traders, I've earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I've worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.