Euro zone finance ministers pressed Spain on Friday to clarify whether it will seek financial support after the announcement of the European Central Bank's new bond-buying program brought Madrid's borrowing costs sharply lower.
Spanish Finance Minister Luis de Guindos deflected questions about a possible aid application on arriving for talks in Cyprus, saying they would discuss in general terms the conditions for ECB intervention in the markets.
"I'd like them to set out their position because it hasn't been clear over the summer what their position is," Irish Finance Minister Michael Noonan told reporters, reflecting concern among several euro zone countries that uncertainty over Spain is holding back a recovery from the bloc's debt crisis.
The ECB has made clear that a Spanish request for help from the euro zone's bailout fund, and the negotiation of strict policy conditions and monitoring, is essential to trigger its bond-buying intervention in the secondary market.
Madrid is resisting any austerity conditions that go beyond European Commission recommendations it is already implementing, while north European creditors led by Germany are adamant that any aid would come with tough conditions.
"It is much more important to meet our public deficit targets and comply with our program of reform than a potential rescue," De Guindos told reporters when asked about conditions for any financial support.
"The fundamental question here is to establish the elements of what could be an intervention of the ECB on the secondary market. I believe that's what we will do today, although it will be in a generic way and not directly in relation to Spain."
For the first time since the start of the year, the ministers' talks will take place at a time when market pressure for immediate action to solve the sovereign debt crisis is easing, rather than mounting.
The ECB's announcement that it could buy unlimited amounts of Spanish bonds, should it apply for help from the euro zone bailout fund, brought Spanish 10-year bond yields down from 7.64 percent on July 24 to 5.62 percent on Thursday.
Italian yields have fallen to around 5 percent and the euro rose above $1.30 after the U.S. Federal Reserve announced a new program of asset purchases to support the economy and fight unemployment.
That increases the temptation for Spain, and EU paymaster Germany, to try to tough it out without an assistance program that would be politically unpopular in both Madrid and Berlin. Each time market stress has eased in the nearly three-year-old crisis, German leaders have said they see no urgent need to act.
ECB President Mario Draghi said in a German newspaper interview that the central bank's policy decision in itself was having beneficial effects.
"There have already been positive results," he was quoted as saying in Friday's Sueddeutsche Zeitung. "The announcement of the facility has contributed to raising confidence in the euro area, and in the euro across the world.
"Fund managers are bringing their money back to Europe. This is good for the euro area economy," Draghi said.
But many policymakers and market analysts believe that for yields to fall further, or even stabilize at these levels, the ECB would have to back up its words with action.
German Finance Minister Wolfgang Schaeuble launched a counter-attack against critics of the bond-buying decision, including the country's influential central bank, saying German worries of unlimited exposure to euro zone bailouts or the ECB printing money to finance debt-laden governments are unfounded.
"The ECB will not make any decisions that lead to the indirect financing of states. That would violate their mandate and they will not do it," he said in a radio interview broadcast on Friday. "I have confidence in the ECB."
Spain is reluctant to ask for help because Prime Minister Mariano Rajoy fears a political backlash at home, but he may eventually have no other choice given Madrid's borrowing needs.
"After the ECB announcements, there is bigger pressure on the Spaniards to apply," one euro zone official said of the talks in Cyprus, itself a candidate for a bailout.
Spain would prefer to apply together with Italy rather than alone, to dilute the impression of having mismanaged its public finances, he added. Rome has so far rejected any such move, although the head of the Italian employers' lobby called on Thursday for Italy to seek EU assistance before next year's general election to stabilize the economy.
WHEN RATHER THAN IF
Several euro zone officials speculated that a Spanish application could come in early October, in time for the next meeting of euro zone finance ministers on Oct 8.
This would be after the presentation of Spain's 2013 budget and the recapitalization needs of its banking sector, both due on September 28.
Markets have rallied after the German constitutional court cleared the way to set up the 500 billion euro permanent euro zone bailout fund ESM, pro-European parties won elections in the Netherlands and the euro zone is moving towards a banking union with the ECB as the single supervisor.
Another euro zone official said Spain should have euro zone support ready when international lenders present their report on Greece - the country where the debt crisis started - in early October, because it will make a grim reading and could upset markets, boosting Spanish and Italian borrowing costs.
Austrian Finance Minister Maria Fekter said Greece could be given more time to reach its fiscal targets but not more money, a view shared by the Dutch.
Proposals for a euro zone banking union were also on the ministers' agenda as giving the ECB the powers of a single euro zone bank supervisor would pave the way for the euro zone's permanent bailout fund ESM to directly recapitalize Spanish banks, lifting some of the debt burden off Madrid's shoulders.
The ESM could also help Ireland in the same way. Noonan told reporters he had already discussed the issue with his French and German counterparts.
"An arrangement which would have the direct recapitalization of Spanish banks and applying that directly to Ireland is contingent on progress being made in Spain," he said.
The ministers will discuss Ireland's long-standing plea to ease the burden on its public finances of some 31 billion euros in promissory notes issued to save two banks from bankruptcy.
Interest payments on the notes are weighing heavily on the budget of Ireland, which is otherwise a euro zone showcase of a country sticking to agreed reforms and recovering.
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