European ministers were set to grant Spain an extra year to reach its deficit targets in exchange for further budget savings but remained far from pinning down details of bank rescues and emergency bond-buying that are of greater concern to markets.
On Monday, a top European Central Bank policymaker said that 17-nation currency area’s debt crisis was now more acute than the financial turmoil happened in 2008 that felled U.S. investment bank Lehman Brothers, as finance ministers of the euro zone met in Brussels.
The ECB Executive Board member Peter Praet told to a conference in Lisbon, “”The euro zone crisis is now much more profound and more fundamental than at the time of Lehman.”
Eurogroup finance ministers were tasked with fleshing out a bare-bones agreement reached by EU leaders at a summit last month on establishing a European banking supervisor and using the bloc’s rescue funds to stabilize bond markets. However, with differences persisting between north European countries such as Finland and the Netherlands and southern states led by Italy and Spain, EU officials said no breakthroughs were likely this week.
German Finance Minister Wolfgang Schaeuble sought to defuse growing opposition at home by saying it would take time to establish a European bank supervisor and only once it was fully in place might ministers decide to allow direct recapitalization of ailing banks by the euro zone’s rescue fund.
Schaeuble said he expected ministers to agree on a timetable for up to 100 billion euros ($123 billion) in aid for debt-stricken Spanish lenders.
The ministers did agree to nominate Luxembourg central bank chief Yves Mersch for a seat on the ECB’s six-member executive board, which has been vacant since Spain’s Jose Manuel Gonzalez-Paramo’s term ended in May.
A wider gathering of EU finance chiefs on Tuesday is set to ease a deficit reduction goal that has forced Madrid to make punishing cuts that are exacerbating a recession.
Spanish Economy Minister Luis de Guindos was to spell out to finance ministers his government’s plan for a package of up to 30 billion euros over several years through spending cuts and tax hikes that are due to be announced this Wednesday.
Furthermore, Spanish and Italian borrowing costs continued to rise on Monday, with Spain’s 10-year bond topping the critical 7 percent level, and world shares fell with a darkening global growth outlook and little prospect of early process on the euro zone’s debt crisis.
A source close to the Spanish government said 10 billion euros of cuts would come this year and that the measures would include a hike in VAT sales tax, reduced social security payments, reduced unemployment benefits and changes to pension’s calculations.
In return, the European Commission will propose easing Madrid’s deficit goal for this year to 6.3 percent of economic output, 4.5 percent for 2013 and 2.8 percent for 2014, officials said.
Based from the drafts recommendation from the European countries to Spain, the ne