German Finance Minister says Spain doesn’t need a second bailout

European finance ministers met in Luxembourg to examine Spain’s efforts to achieve fiscal stability and the progress made on the reform front.

Exposing the divisions among euro-zone member countries who want the government of Mariano Rajoy to ask for a second rescue package -- in addition to the aid granted to recapitalize Spanish banks -- and those who don’t, German Finance Minister Wolfgang Schäuble said Spain did not “need a bailout program.”

“Spain is doing everything necessary in the area of fiscal policy and structural reforms,” Schäuble told reporters before entering the meeting. “Spain has a problem with its banks as a consequence of the real estate bubble of the past years. For that reason, Spain is receiving aid to recapitalize the banks.

“And, of course, Spain, like any other country, is suffering the problems of contagion and speculation in in the financial market,” Schäuble added. “But Spain doesn’t need an assistance program. That is what the Spanish government has said time and again.”

The Rajoy administration will not consider tapping the ESM until it knows the conditions

Germany is believed to want to group any decisions as regards bailout for southern euro-zone members together.

The finance ministers’ meeting was due to officially approve the establishment of the European Stability Mechanism (ESM), the permanent successor to the European Financial Stability Facility (EFSF).

The Rajoy administration has insisted that it will not consider tapping the ESM until it knows the conditions that would be attached to such a move. European sources believe a request could be forthcoming toward the end of this month or the start of November. Galicia and the Basque Country are due to hold regional elections on October 21. A number of leading players in the Spanish business community have urged Rajoy to ask for a second bailout as soon as possible.

If a euro-zone member country first asks the ESM to buy its bonds in the primary market, this will trigger unlimited purchases in the secondary market by the European Central Bank (ECB). The idea is for the ECB to buy bonds for a period of eight weeks and stopping purchases the following four weeks to gauge the impact of its intervention.

There have also been suggestions that euro-zone countries could guarantee a part of Spanish sovereign debt issued in the primary market. This would greatly reduce the costs of a bailout and leave the ESM with more ammunition for other problems.

The IMF estimates that the proportion of a country’s risk premium attributable to market tensions is around 200 basis points. With the risk premium at 425 in late trading on Monday, that would mean the premium that reflects concerns about the Spanish economy and its deficit-reduction program would be around 225 basis points.

There is growing skepticism about the Spanish government’s ability to hit its deficit targets of 6.3 percent and 4.5 percent for this year and the next, with the country already in recession and expected to remain so next year. Experts have questioned the administration’s growth forecast for 2013 of a contraction in GDP of only 0.5 percent, suggesting it could be more than double that.