MercoPress. South Atlantic News Agency

Germany and France express support for Spain but markets demand more than words

De Guindos from Berlin flies to Paris to meet Moscovici (Photo: Europa Press)

German Finance Minister Wolfgang Schaeuble and his counterpart from Madrid said Spain’s borrowing costs don’t reflect the strength of its economy as they pledged to work toward deeper integration to fight the debt crisis.

“The current levels of interest rates on sovereign debt markets don’t correspond to the fundamentals of the Spanish economy,” Schaeuble and Spanish Economy Minister Luis de Guindos said after meeting in Berlin in a joint statement that also praised Spain’s deficit-cutting efforts.

Catalonia, the biggest regional economy and the most indebted, said on Tuesday it is considering tapping the fund, and Valencia, the second-most burdened, has said it will do so.

Spain’s bank bailout and agreements made among European leaders at the end of June to build a so-called banking union should be implemented “quickly,” they said. Schaeuble starts his three-week vacation on Wednesday, while de Guindos visits Paris for talks with his French counterpart, Pierre Moscovici.

Spanish 10-year bond yields surged to a Euro-era record of 7.64% on Tuesday, prompting policy makers to deny an international bailout was being prepared for the Euro region’s fourth-largest economy. After taking on as much as 100 billion Euros of bailout loans to aid banks, Spain’s government is struggling to maintain access to markets.

Luxembourg Finance Minister Luc Frieden said no work is being done for a rescue of the Spanish government, though officials in the 17-nation Euro area must be prepared to move quickly.

“In such difficult times as we are in, one has to follow the situation on a permanent, daily basis and be ready to act at any moment,” Frieden said, adding that “the political decisions in the case of Spain and also of Greece have been taken to be able to act fast. That’s what is important especially now in the summer months.”

De Guindos will meet Moscovici in Paris after French President Francois Hollande backed Rajoy and Italian Prime Minister Mario Monti as they argued last month for policies to spur growth, rebelling against German prescriptions for solving the crisis. Hollande has also recommended measures to reduce borrowing costs in Spain and Italy.

A full-blown Spanish bailout can be averted if the European Central Bank starts buying the nation’s bonds in large quantities, the head of the Organization for Economic Cooperation and Development said. Europe should deploy all of its instruments “but mostly the ECB,” OECD Secretary General Angel Gurria said in a Bloomberg Television interview in London. “There is the bazooka.”

Spain didn’t have enough funds to bail out its banks and the central government is now at risk of being overburdened by the borrowing needs of cash-strapped regional governments that are locked out of markets. Prime Minister Rajoy’s administration created an 18 billion-Euro facility on July 13 to help states meet their debt redemptions and plug shortfalls.

Concerns the Spanish government itself will need some kind of international assistance helped push down the Euro. On Tuesday the European currency fell below 1.21 US dollars for a second day, also pressured by Moody’s Investors Service’s decision to cut its outlook for the Aaa credit ratings of Germany, the Netherlands and Luxembourg. As Spanish bonds slumped, the main Ibex 35 share index fell 3.6% in Madrid.