Weekend Economists Chart the Bradbury Chronicles, June 8-10,2012

[Demeter]

101. Bundesbank: the eurozone's secret dictator

http://www.telegraph.co.uk/finance/financialcrisis/9321661/Bundesbank-the-eurozones-secret-dictator.html

German Chancellor Angela Merkel may be the dominant force in the eurozone but the Bundesbank, Germany’s powerful central bank, is the power behind the throne....

When the details of the (SPANISH BANK) bail-out are agreed, it will almost certainly be presented as generous to Spain and evidence of Germany’s unstinting support for the eurozone project. Spain is expected to be pledged the funds from the European Financial Stability Facility (EFSF) or the IMF’s precautionary credit line — set up to help the “innocent victims” of the euro crisis. Under the deal, Madrid will borrow the money to recapitalise its banks at a rate it would not be offered in the market.

The cheap, state-backed funds will mean that Spain’s national debt rises from the 72pc of gross domestic product (GDP) forecast this year by the IMF to about 80pc — still lower than both France and the UK. But, crucially, neither the EFSF or IMF funds would come with any fiscal conditions attached. Despite appearances, though, Germany will not have given an inch. The EFSF’s existing statutes say the funds can be used for a banking bail-out, and the only conditions attached will be financial sector reform. More importantly still, the EFSF funds will not rank senior to other holders of sovereign debt — which makes them potentially preferable to IMF funds. Were the private sector subordinated to the bail-out fund, traders fear investors would be even less likely to buy Spanish government bonds, yields on which have spiked to unaffordable levels of more than 6pc.

So long as the bail-out is less than €100bn, economists say, the bank rescue should stabilise Spain. Thomas Mayer, senior adviser at Deutsche Bank, is confident that the deal will help restore market confidence in Madrid, which has pushed through difficult but vital labour market reforms. But, Mayer added, there should be no mistake — at no point in the negotiations did Germany stop playing hardball. Chancellor Angela Merkel was never going to put taxpayers on the hook for the estimated €180bn of bad real estate loans made by Spanish banks....