http://www.zerohedge.com/contributed/2012-18-02/merkels-hot-water-so-all-future-backstops-will-be-even-more-strings-attached
Submitted by Phoenix Capital Research on 05/02/2012 22:25 -0400
The Süddeutsche Zeitung newspaper is reporting in its Thursday edition that the European Central Bank and Euro Group member countries are exploring strategies at the highest level to allow financial institutions direct access to funds from the European Stability Mechanism, the permanent bailout fund that is to be created this summer. The change would mean that banks, rather than countries, could turn to the fund for aid during a financial sector crisis.
Euro-zone member states are apparently concerned that recent efforts by the European Central Bank to flood banks with cheap credit were insufficient to stave off the crisis. In two steps, the ECB recently issued cheap longterm loans to European banks with a total value of €1 trillion. But this aid is only slowly reaching businesses. That's why leaders are now considering providing the ESM with similar bank lending capabilities, according to the Süddeutsche.
Merkel's in Hot Water... So All Future Backstops Will Be Even MORE "Strings Attached"
Spain, which is now at the forefront of the Great Western Debt Default Collapse, has opted to seek funding from the mega-bailout fund, the European Stability Mechanism (ESM) rather than going directly to the ECB or the IMF.
The reasons for this are clear: the IMF doesn’t have the funds (nor will it as the US won’t fund a European bailout during a Presidential election year). And the ECB is now backed into a political corner with Germany.
However, Spain is discovering that even ESM funding doesn’t come without strings attached:
Germany Rejects Spain Banks Tapping Bailout Fund, Meister Says
Spain’s rating downgrade at Standard & Poor’s doesn’t alter Germany’s stance that banks can’t have direct access to Europe’s financial backstops, a senior lawmaker from Chancellor Angela Merkel’s party said.
“The German position is absolutely strict,” Michael Meister, the deputy caucus chairman of Merkel’s Christian Democrats, said in a phone interview in Berlin. “And since such aid programs require unanimity, there’s not going to be any change. All sorts of people can try to set things in motion, but Germany won’t vote for it.”
The ESM funding idea is really just Spain playing for time (the ESM doesn’t actually have the funds to bail Spain out). But the fact that Germany is now making the ESM a political issue indicates the degree to which political relationships are breaking down in the EU. And once the political relationships break down… so will the Euro.
Indeed, Germany has no choice. If it decides to prop up Spain it will receive a ratings downgrade (something which France is about to experience anyway). Europe with a downgraded Germany is not a pretty sight.
Moreover, Germany’s decision to prop up the Euro is finally beginning to arouse furor from the German population. In particular, the below story which reveals that Germany has in fact put German taxpayers on the hook for over €2 trillion in back-door EU rescue measures could be the proverbial tipping point that sends German voters over the edge.
German tempers boil over back-door euro rescues
Professor Hans-Werner Sinn, head of Germany's IFO Institute, said German taxpayers are facing a dangerous rise in credit risk from a plethora of bail-out schemes. "The euro-system is near explosion," he told Austria's Economics Academy on Thursday.
Dr Sinn said Germany is on the hook for much of the €2.1 trillion (£1.72 trillion) in rescue measures for EMU debtors - often by the back-door - that will saddle Germans with ruinous losses one day.
"It is a horror scenario," he said, warning that the euro system is splitting friendly countries into blocs of mutually hostile creditors and debtors, exactly the opposite of what was hoped.
Earlier this week, the Foundation for Family Business in Munich filed a criminal lawsuit against the Bundesbank, accusing the board of disguising the true scale of risk born by German citizens.
This is the last thing Angela Merkel needs right now. Between this and inflation arising in Germany she’s in major political hot water. So expect Germany to push even harder when it comes to fiscal austerity in the future…
On that note, I fully believe the EU in its current form is in its final chapters. Whether it’s through Spain imploding or Germany ultimately pulling out of the Euro, we’ve now reached the point of no return: the problems facing the EU (Spain and Italy) are too large to be bailed out. There simply aren’t any funds or entities large enough to handle these issues.
and...
http://www.spiegel.de/international/business/0,1518,829904,00.html
Spain's Credit CrunchEuro Group Considers Direct Aid for Banks
Deadly Credit Crunch
When the euro backstop fund was first created, it was considered a taboo to use the money to directly bail out banks. Now, though, it appears a number of euro-zone countries as well as the European Central Bank are seeking to ease the rules in order to prevent a banking crisis in Spain from forcing the country to request aid from the common currency rescue fund.
Although not named, the plan is clearly aimed at Spain, where many banks are in desperate need of additional financing in order to continue providing corporate loans. The banking crisis there is coming at a time when the Spanish government is being forced to push through stringent austerity measures. In recent weeks, the situation in the southern European country has intensified dramatically, with risk premiums on Spanish government bonds rising markedly on several occasions. Many fear the contagion could spread to other euro-zone countries. "Once Spain seeks a bailout, then the markets will focus on Italy," one unnamed euro-zone source told the newspaper.
Deadly Credit Crunch
A working group of euro-zone member states is moving hastily to explore the options available. According to the paper, they plan to review in the next two weeks how the ESM could be adapted to allow direct access to the funds by banks it believes are capable of surviving but are experiencing a potentially deadly credit crunch. TheSüddeutsche reported that the leaders are moving quickly because of the worsening situation in Spain.
The effort, assuming it materializes, is likely to provoke a heated debate within the European Union. Over the weekend, German Finance Minister Wolfgang Schäuble, of Chancellor Angela Merkel's conservative Christian Democratic Union party, expressed his vehement opposition to allowing the ESM to provide direct loans to banks. The governments of the Netherlands, Austria and Finland also oppose plans to provide ESM aid directly to banks.
Under the current rules for the euro bailout program, only euro-zone member states can request money from the backstop fund. Countries can then in turn lend that money to banks, but the governments are also required to adhere to strict austerity and reform measures as part of the deal. These stipulations were an important precondition for getting Germany to agree to the EU bailout fund in the first place. If ESM were permitted to lend directly to banks, it would effectively nullify those provisions.
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