Gradually, the key open items [10] from yesterday's Spanish bailout are getting some closure. First, we learned that Ireland, as speculated, will demand a comparable retroactive bailout [11] renegotiation, an act which also puts the Greek elections a week from today in play. Then, we got definitive confirmation that the Spanish loan, coming at ~3% or half Spanish GGBs, is a priming loan, subordinating existing creditors [12]. Finally, we learn that the ESM - the bailout mechanism at the heart of all current and future European bailout plans, and which still has not been ratified by Germany [13], is in danger of being scuttled by none other than the German opposition. The reason? According to a Reuters report [14], "A [Spiegel] report that German Chancellor Angela Merkel is not serious about implementing a European financial transaction tax threatens to undermine an initial deal struck last week with the opposition over the EU's planned fiscal pact... The Social Democrats (SPD) and Greens are insisting on a plan for a transaction tax and measures to boost growth."
It now appears, Merkel has been posturing on the issue which the opposition holds quite dear. However, she needs the opposition on her side to pass not only the fiscal pact but the ESM ratification, without which the entire Spanish bailout collapses: "She wants to push the pact through parliament in the next few weeks together with a bill on the new European Stability Mechanism (ESM) bailout fund which Spain may use, but needs the opposition to get the required two thirds majority." All this ignores what Die Welt reported earlier today, that "Spanish banks should come under special supervision" according to Volker Kauder, parliamentary leader of Merkel’s CDU, something which the Spain public would violently oppose. In other words: hold off on popping the Spanish bailout champagne...
Continuing with Reuters [14]:
It would be a major embarrassment if Germany, which as euro zone paymaster dictates much of its crisis response, missed its deadline for ratification on July 1 when the ESM is due to take effect.
Finance Minister Wolfgang Schaeuble tried to pressure the SPD and Greens.
"It would be completely irresponsible not to ratify the fiscal treaty," said Schaueble on ARD television, adding he doubted a European financial transaction tax would be introduced in this legislative term which runs until next year's elections.
He said on Saturday that Spain's decision to request aid made it even more important to quickly ratify the fiscal pact and ESM. Its greater flexibility makes the ESM preferable to the European Financial Stability Facility (EFSF) to use for Spain.
The fact is that now that Germany has pre-committed to an ESM-funded rescue, the German opposition suddenly finds itself with absolutely all the leverage. It knows very well that without its support, the ESM, the Spanish Bailout, and implicitly, the EMU itself, crumbles. Can you spell nuisance value again?
In the meantime, it seems that even if the ESM vote passes, the European banking sector will be crippled for years to come, as the gating issue is now the same transaction tax that the US and UK had been rejecting for years:
The magazine report triggered an angry response from the SPD and Greens.
"Ronald Pofalla's comments are a blow to the fiscal pact talks," said senior SPD member Thomas Oppermann, adding they sowed doubts as to whether the coalition really wanted a deal.
"We need an irreversible commitment to introduce a financial transaction tax. There will be no formulaic compromises with the SPD," he said.
In essence, a lose-lose for Europe's insolvent banks, as being forced to pay even more tax will sap already negative profits even more.
But the bigger issue for now, of course, is whether the fiscal pact, and thus the ESM, can even get the required votes.
SPD leaders stressed at the weekend that its support for the fiscal pact was not yet a done deal.
"Agreement with the federal states is still needed and the government has delivered little on growth and fighting youth unemployment," SPD parliamentary party leader Frank-Walter Steinmeier told the Frankfurter Allgemeine Sonntagszeitung.
"There must be movement on this in the coming days."
On Monday, Schaeuble will discuss the fiscal pact with ministers from Germany's 16 federal states and parliamentary leaders from all parties will also hold talks.
At the end of the day, what really matters is popular opinion, and needless to say, it is not supportive of what just happened.
Highlighting the domestic pressure she is under to take a tough line with struggling euro zone members, an Emnid poll for Bild am Sonntag newspaper showed 66 percent of Germans are opposed to supporting Spanish banks with German money.
And of course, there is this from May 30 [13]:
Germany's Government Still Opposes Direct ESM Aid For Banks
Government spokesman Steffen Seibert said at a regular press conference here that the German rejection of the idea of any direct recapitalisation of banks by the ESM "is well known."
The treaty creating the ESM explicitly states that the fund can only lend to governments in return for promises of reforms. The German government has stressed on numerous occasions that it insists that this passage of the treaty is respected. The treaty has yet to be ratified by most governments including Germany.
Stated otherwise, an unwind of the existing bailout framework is only one general election away, when am upstart party takes advantage of the popular anger at the Spanish bank bailout, and proceeds to undo years of Merkelian pro-Euro policies.