Sentiment in European markets was lifted on Tuesday by better-than-expected preliminary quarterly Q2 GDP results in Germany and France. Still, the Q2 GDP growth estimate for the entire Eurozone showed a 0.2% contraction.
Spanish newspaper la Vanguardia reported on Tuesday that Spain would most probably ask for a banking bailout by the end of this week. The Bank of Spain is preparing a formal request together with the Finance Ministry. The request is supposed to be sent to Brussels as soon as possible, allowing the EU to release the first tranche of the 30 billion aid, necessary to prop up the country's nationalized banks.
According to la Vangurdia the formal application for the EFSF/ESM aid will be submitted on Thursday or Friday this week. The funds will be used to cover the necessities of Spanish banks such as Bankia, CatalunyaCaixa, Banco de Valencia o NovaGalicia.
According an OANDA economist Alfonso Esparza, who quotes an analyst from Barclays: “That would pave the way for the ECB intervention to curb the rising of the Spanish government bonds.” Nevertheless, Mr. Esparza also lists the uncertainties connected with such a move: “1) the conditionality attached to the ECB intervention; 2) the actual modus operandi of primary and/or secondary market buying by the EFSF; and 3) the impeding decision by the German Constitutional Court on the ESM.”
Meanwhile, Spanish president Mariano Rajoy, who held a meeting today with the King of Spain in Mallorca, told reporters afterwards that he would need more information on ECB's plans and conditions as far as bond purchases are concerned before submitting the request for funds.
“Those conditions do not appear to have been decided yet,” remarks Marc Chandler, Global Head of Currency Strategy at BBH. “Draghi has hinted that the mechanism will be developed in ECB committees. (...)Rajoy is most likely continuing to flirt,” he concludes.
It was also made known on Tuesday that 33% of all gross ECB borrowing in July was to Spain, totaling the amount of €402.2B, up from €365B in June.
New ESM lawsuit, new challenge for the rescue fund?
A new threat to activate the European Stability Mechanism is in the works, after a group led by German Professor Markus Kerber filed in a lawsuit to the German constitutional court, aiming to delay the approval of the ESM by several months.
The group is against Germany’s Constitutional Court ruling on the fund as planned on September 12, because of a similar case filed in the European Court of Justice in Luxembourg, business daily Handelsblatt reported Monday.
Kerber’s office said the lawsuit is “on its way to the constitutional court in Karlsruhe”. Kerber’s demands the German court to hold any decision on the ESM until the ECJ in Luxembourg has its verdict, following an Irish parliamentarian complain against the ESM about 2 weeks ago.
If the case is accepted, it could spark further unrest in the euroarea, with investors most likely to feel unease amid the uncertainty over the financial resources available, thought to be used as a safety-net when the time comes to bailout Italy and Spain should bond yields resume upward trends.
"We are currently considering the request,” a spokesman at the Luxembourg-based court said on Monday, including whether to take the case under so-called “accelerated procedure”, the FT reports. "Normal procedure in the court could take up to 18 months, but accelerating the case could reduce that delay to “a few months”, according to officials at the ECJ.