Just when Spain thought that by admitting it is broke, Germany would finally turn a blind eye and let it have whatever money it requested directly at the bank level, instead of boosting its sovereign leverage even more, thus putting it at risk of long, long overdue Moody's and Fitch downgrades, here comes the Germany, adding insult to humiliation. From the FT [7]: "The parliamentary leadership of Germany’s ruling Christian Democrats – the majority party in Angela Merkel’s centre-right coalition government – has flatly rejected the use of eurozone rescue funds to recapitalise Spanish banks directly. Instead they called on the Spanish government on Tuesday to decide urgently whether it will seek money from the €440bn European Financial Stability Facility according to the fund’s normal rules, requiring agreement on a proper rescue programme negotiated with its European partners." In other words Germany has laid out the choice: bail out your banks with our help, and be downgraded, pushing Spanish sovereign yields into the 7%+ range, or do nothing, and prepare to hand out an infinite amount of Spiderman beach towels.
And for those hoping that Germany is acting counterproductively to its own interests, which for those confused, are to have Europe at the edge of chaos, keeping the EUR low, and its Debtor In Possession targets amenable to any terms, three words: nein, nein, nein.
There was no sign in Berlin, however, of more urgent emergency measures being contemplated to prevent contagion in the current crisis spreading from Greece to Spain and beyond. Instead, the timescale for Germany’s proposed reforms would stretch until the spring of 2013.
Wolfgang Schäuble, German finance minister, held out the prospect on Tuesday of medium-term reforms, such as a “banking union” to provide deposit insurance for cross-border financial institutions, and even jointly guaranteed eurozone bonds – but only once a fully fledged “fiscal union” had been agreed for the whole eurozone.
In an interview with Handelsblatt, a business newspaper, he said that it was important to distinguish between immediate measures to resolve the present crisis and longer-term reforms to prevent its recurrence.
Both Greece and Spain, he said, must put their own economies in order.
It was up to Greek voters to decide for themselves whether they would remain members of the eurozone, he said. But he admitted that uncertainty over the outcome of the forthcoming Greek election had caused contagion to spread to Spain.
“The Spanish are doing everything right, and yet they are still facing pressure in the markets because of contagion from Greece. We must deal with that.”
At the end of the day, what will make Germany amenable to any plan, is if the PIIGS pledge their thousands of tons of gold to a German "pawn shop" as explained last week. [8]
[8]Oddly enough we have yet to see them lining up with, and presenting the ultimate collateral.