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EU leaders meet as Spanish bailout application looms

Rising speculation that Spain will ask for help on its borrowing costs has helped ease the pressure on the country in financial markets.

BRUSSELS: Spain edged closer Wednesday to asking for bailout aid after months of hesitation on the eve of a summit where European Union leaders aim to strengthen the bloc's shaky foundations.

An EU diplomatic source told AFP that "things are evolving" and that if Madrid does not ask for help at Thursday and Friday's summit in Brussels, it could do so as early as next week.

This would be the first use of the eurozone's new rescue fund, the European Stability Mechanism (ESM) and would in turn allow the European Central Bank to intervene on the markets, pushing down borrowing costs for Madrid.

The net effect would be to set in motion measures agreed at a June summit to bolster the bloc with a new rescue system plus tighter economic and fiscal policy coordination -- issues to be discussed further at the meeting on Thursday and Friday.

Spanish Prime Minister Mariano Rajoy could use the summit to "make explicit the conditions that would be imposed in exchange for aid" over and above those agreed in June to help Spain's battered banks, the diplomatic source said.

French President Francois Hollande meanwhile said the end of the eurozone debt crisis, which has likely driven the bloc into recession, was close.

"On the exit from the eurozone crisis, we are close, very close ... because we took the right decisions at the summit of June 28-29 and because it is now our duty to apply them rapidly," Hollande said in an interview.

If the end was in sight, the EU still had to ensure that countries which had made painful efforts to reform their finances were rewarded with lower interest rates, he said, referring to Greece and Spain.

He also stressed the need to make progress toward a single European bank regulator by the year-end deadline agreed in June and toward greater shared decision-making.

The pressure on Spain eased considerably Wednesday on the reports of a possible aid request and a decision by Moody's rating agency not to downgrade the country's Baa3 assessment, leaving it one step above "junk" grade.

Moody's cited the ECB's willingness to buy Spanish government bonds as well as Madrid's commitment to implementing tough fiscal and structural reforms.

In a positive pre-summit sign from the EU's economic powerhouse and paymaster Germany, Chancellor Angela Merkel said progress in southern European states had been "slower than we might have liked" but that nonetheless "something has changed in their way of thinking."

If EU leaders meet without the crisis anxiety of previous summits, they still have to confront a deepening recession and increasing unease at the austerity measures they have introduced to combat the debt crisis.

At the same time, there are serious divisions between Europe's major powers on how to ensure the euro single currency can survive, with leaders going into the first of three summits before Christmas aiming to come up with the answer.

One of the hot-button issues is the plan for a single European bank regulator, the first step towards allowing the ESM to directly help ailing lenders.

The 17 eurozone states largely support the proposal, although serious differences over timing remain, but their non-euro peers are uneasy that their banks operating in the bloc might face new regulation without their say-so.

Berlin has made clear that the idea, agreed at the breakthrough June summit, should go slower and be less ambitious than some, including France, would like.

Britain in turn opposes any measure that could harm the interests of the City of London, one of the world's biggest financial markets.

"Any further integration amongst eurozone countries must be achieved in the right way -- respecting and protecting the integrity of the single market and in the interests of all EU members," one EU diplomat said, highlighting tensions between euro and non-euro states.

The leaders will be discussing proposals to reinforce economic and monetary union drawn up by EU president Herman Van Rompuy, with input from European Central Bank chief Mario Draghi, Eurogroup head Jean-Claude Juncker and European Commission chief Jose Manuel Barroso.

Van Rompuy has suggested that reforms might include the pooling of debt, by the strong and the weak alike, so that the risk is shared by all eurozone members when they issue common bonds to raise funds.

Germany remains dead set against this idea, fearing this would give weaker eurozone states a free ride in the markets at its expense.

During the talks, the 27 European leaders will also review relations with China, and discuss hotspots Syria, Iran and Mali.

 
A version of this article appeared in the print edition of The Daily Star on October 18, 2012, on page 6.

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