The euro zone’s big four meet in Rome with Germany’s Angela Merkel likely to come under pressure from Italy’s Mario Monti, Spain’s Mariano Rajoy and France’s Francois Hollande to loosen her purse strings and principles.
Monti, with Hollande’s backing, has suggested using the euro zone rescue funds to buy Spanish and Italian bonds but Berlin is not keen and there are good reasons why it might not work, not least the ESM’s preferred creditor status which means that if it piled in, private investors may flee knowing they would be paid back last in the event of a default.
The Eurogroup may have skirted the same problem with regard to the Spanish banking bailout last night by deciding to start the loans via the existing EFSF, which does not have seniority, before switching to the ESM. The EFSF’s rules will persist throughout.
It’s possible that Rajoy will announce the formal request for bank aid in Rome. Last night, Eurogroup chairman Juncker said it would be done by Monday. An independent audit said up to 62 billion euros was needed. Officials hinted they would take more to cover any margin for error.
Monti got his retaliation in first overnight, giving an interview to a number of European newspapers to say if next week’s EU summit does not deliver, Spain and Italy would come under ever greater market “harassment” which would ruin any growth strategy put forward by the bloc’s leaders. He said euro zone leaders were working on a plan designed to halt the spread of debt contagion while satisfying Germany’s refusal to sanction financial irresponsibility. But details there were none.