Plans for a 300bn Euro rescue of Spain and writing down of Greek bonds
Spain has for the first time conceded it might need a full EU/IMF bailout worth 300 billion Euros if its borrowing costs remain unsustainably high, a Euro zone official was quoted in the Madrid media.
Economy Minister Luis de Guindos brought up the issue with German counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday as Spain's borrowing costs soared past 7.6%, the source said.
If needed, the money would come on top of the 100 billion Euros already agreed to prop up Spain's banking sector, stretching the Euro zone's resources to breaking point and Schaeuble told de Guindos he was unwilling to consider a rescue before the currency bloc's ESM bailout fund comes on line later this year.
As Schaeuble and de Guindos were meeting last Tuesday, Spanish borrowing costs reached their highest level since the country adopted the Euro, hitting 7.64% for 10-year bonds - a level at which Spain cannot sustainably borrow from the markets.
European Central Bank President Mario Draghi who this week pledged to do whatever was necessary to protect the Euro zone from collapse is set to meet Germany's Bundesbank President Jens Weidmann to discuss a raft of measures.
Allegedly Draghi's proposal involves Europe's rescue funds buying government bonds on the primary market, flanked by ECB purchases on the secondary market to ensure transmission of its record low interest rates.
However Weidmann poses the biggest obstacle to any ECB plan to buy government bonds, and Draghi would need to win him over. A Bundesbank spokesman said meetings between the two men are not unusual; they take place if there is something that needs to be discussed.
Draghi apparently also favours granting a banking licence to the Euro zone's planned permanent bailout fund, the European Stability Mechanism (ESM), which would allow it to borrow money and deploy more firepower if called upon to rescue an economy as big as Spain's.
Spain is far larger than the four other countries that have accepted EU bailouts, and rescuing it would require action on a scale as yet unforeseen. It may be a price that needs paying to save the single currency, analysts say.
News that policy makers were considering having central banks a write off some of their Greek debt was another sign of radical measures contemplated behind the scenes.
Private sector holders of Greek debt already wrote off most of the value of their holdings this year in history's biggest sovereign debt restructuring, agreed alongside a 130 billion Euro second package of EU, IMF and ECB loans to rescue Athens.
One option being worked on would involve the ECB and the national central banks that make up the Euro system writing down the value of the Greek government bonds they hold by 30%. Total outstanding official debt to Greece is about 220-230 billion Euros.
French newspaper Le Monde reported that the ECB and Euro zone governments were preparing co-ordinated action to cut Spanish and Italian borrowing costs. The Euro zone's two most powerful politicians, German Chancellor Angela Merkel and French President Francois Hollande, this week spoke on the phone and issued a joint statement saying they were determined to do everything to protect the euro zone.
But Germany's Bundesbank pushed back, saying purchases of bonds by the ECB to reduce borrowing costs of governments would be problematic. Germany regards such measures as potentially allowing the ECB to finance state spending, which it views as against European law.