FRANKFURT (MNI) – The Spanish aid program is necessary to help
break the negative feedback loop between the country’s beleaguered banks
and its government, German Finance Minister Wolfgang Schaeuble said
Thursday.

But he also again insisted the Spanish government would be liable
for paying back the European rescue funds it receives, even once the aid
package falls under the European Stability Mechanism.

Speaking before the German Bundestag ahead of a vote on the Spanish
aid program, Schaeuble warned that even the “appearance” of an inability
by Spain to pay back its debts “can lead to grave contagion effects in
the Eurozone.”

Spain is on a “good path” towards reducing its deficits and
implementing the necessary structural reforms needed for growth,
Schaeuble said.

“But this can only work if the banking sector problems are also
solved, and this is about breaking the vicious circle between sovereign
and bank risks,” Schaeuble said.

Germany therefore had a “strong interest” in backing the aid
program for Spain, Schaeuble said. The Bundestag is expected later
Thursday to back the Spanish aid program by a broad majority.

But Schaeuble also sought to once again make clear that the Spanish
government would be liable for the aid. Talk of a banking union, which
could lead to direct bank recapitalizations by the ESM, was a “debate
looking to the future” that should be kept separate from consideration
of aid for Spain.

“In any case, the Spanish government will be liable for the
repayment of the aid to the EFSF, and in future the ESM. Any other
arrangement is not even possible according to the agreed treaties,” he
said.

Schaeuble also repeated that any direct bank recapitalization by
the ESM can only be considered once a “functioning” European banking
supervisory exists.

Schaeuble acknowledged “the economic situation in Europe and beyond
is still weighed down by the financial markets’ uncertainty over
developments in the Eurozone.”

But he insisted Europe has made progress in improving its
institutions and mechanisms.

“I am convinced that we are on the right path,” Schaeuble said,
“but we need time.

— Frankfurt bureau: +49 69 720 142; email: ccermak@marketnews.com —

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