EU leaders meet as Spain bailout looms

Spain edged closer yesterday to asking for bailout aid after months of hesitation on the eve of a summit where European Union leaders aim to strengthen the bloc’s shaky foundations. An EU diplomatic source said “things are evolving” and that if Madrid does not ask for help at today and tomorrow’s summit in Brussels, it could do so as early as next week. This could mean the first use of the eurozone’s new rescue fund, the European Stability Mechanism (ESM) and would in turn allow the European Central Bank to intervene on the markets, pushing down borrowing costs for Madrid. The net effect would be to set in motion measures agreed at a June summit to bolster the bloc with a new rescue system plus tighter economic and fiscal policy co-ordination — issues to be discussed further at the summit. Spanish Prime Minister Mariano Rajoy could use the event to “make explicit the conditions that would be imposed in exchange for aid” over and above those agreed in June to help Spain’s battered banks, the diplomatic source said. “The Spanish prime minister can now breathe a little bit more freely,” said Gekko Global Markets analyst Anita Paluch, adding that with markets calmer, “the pressure on Spain to sign the request for aid has definitely lessened.” French President Francois Hollande meanwhile said the end of the eurozone debt crisis, which has likely driven the bloc into recession, was close. “On the exit from the eurozone crisis, we are close, very close ... because we took the right decisions at the summit of June 28-29 and because it is now our duty to apply them rapidly,” Hollande said. The pressure on Spain eased considerably yesterday on the reports of a possible aid request and a decision by Moody’s rating agency not to downgrade the country’s Baa3 assessment, leaving it one step above “junk” grade. Moody’s cited the ECB’s willingness to buy Spanish government bonds as well as Madrid’s commitment to implementing tough fiscal and structural reforms for maintaining the rating. The yield or the rate of return earned by investors in the benchmark Spanish 10-year government bond tumbled to 5.494% yesterday from 5.805% late on Tuesday — the first time it has been below 5.5% since April. Having hit record levels above 7.0%, unsustainable levels, earlier this year, Spain and the eurozone can now breathe a lot easier. In a positive pre-summit sign from the EU’s economic powerhouse and paymaster Germany, Chancellor Angela Merkel said progress in southern European states had been “slower than we might have liked” but that nonetheless “something has changed in their way of thinking.” If EU leaders meet without the crisis anxiety of previous summits, they still have to confront a deepening recession and increasing unease at the austerity measures they have introduced to combat the debt crisis. At the same time, there are serious divisions between Europe’s major powers on how to ensure the euro single currency can survive, with leaders going into the first of three summits before Christmas aiming to come up with the answer.