George Orwell was a prophet when he summarized in a single phrase the equality in the Animal Farm: “All animals are equal, but some animals are more equal than others“. Paraphrasing the line of pig Napoleon and adjusting it to the farm of the Euro Zone, the famous line can very clearly be read as “All PIIGS are equal, but some PIIGS are more equal than others.”.
Remember the tet-a-tete chat between German Finance Minister Schaeuble with his Portuguese counterpart Vitor Caspar last February, when the German promised the Portuguese “changes in Portugal’s bailout” once he is finished with Greece?
Now another member of the PIIGS club is going to get preferential treatment: and that is Spain! EU diplomats said on Monday that Europe would grant Spain an extra year to reach its deficit targets.
So far no consessions were made to Greece even though there is talk for a two year extension. That would be accompanied by a third bailout.
“Europe will grant Spain an extra year to reach its deficit targets after it outlines further budget savings to finance ministers meeting in Brussels, diplomats said on Monday.
Although no final decision is expected at a Monday meeting of euro zone finance ministers on a bailout of Spain’s banks, a wider gathering of EU finance chiefs on Tuesday is set to ease a debt goal that has pressured Madrid to make punishing cuts that are exacerbating a recession.
“Spain’s budget consolidation targets will be adjusted to give it an extra year,” said one of the diplomats.
“This is not a unilateral move. Spain needs to make the necessary cuts to reach that goal and this will be discussed on Tuesday at the Ecofin (meeting of ministers). I expect the extra year to be granted.”
Officials said the European Commission will propose a new deficit goal of 6.3 percent of economic output for this year, 4.5 percent for 2013 and 2.8 percent for 2014.
Madrid had been due to reduce its budget deficit to 3 percent of gross domestic product by the end of 2013. But a deep recession is putting that beyond reach.
The Commission will make the proposal to the EU’s finance ministers on Tuesday, who would then have to agree. At that point it would become binding, two officials told Reuters.
Economy Minister Luis de Guindos will spell out to the meeting 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.
A source close to the Spanish government said 10 billion euros of cuts would come this year and that the measures would include a VAT hike, reduced social security payments, reduced unemployment benefits and changes to pensions calculations.
A decision on the full details of a bailout of up to 100 billion euros ($125 billion) Spain has requested for its banks is also due shortly.
A Spanish government source said it would sign a memorandum of understanding on Monday in Brussels regarding the rescue, which would be followed on July 20 by a full loan agreement. As part of that, it will agree to create a single bad bank to house toxic assets from its banking sector.
While Madrid strives to cut its debts and shore up its struggling banks, it has consistently pleaded for help to get down its borrowing costs. Spanish 10-year government bond yields above seven percent are not sustainable indefinitely. (Further Reading Reuters via BusinessReport)
Of course, Spain is not (yet) in the bailout mechanism as Greece is. But when Greeks read such news, no wonder they develop an aversion against Germany and its Northern satellites. Or they refrain from paying the extraordinary and emergency taxes.
PS I wonder how the Spaniards react about the harsh austerity. Not much different than the Greeks, I hear.