German bank chief urges conditions on Spain rescue

German central bank chief Jens Weidmann urged the eurozone to impose broad conditions on Spain for its vast banking sector loan, in an interview published here Friday. The call, in an interview with daily El Pais, is a direct challenge to the Spanish government. Prime Minister Mariano Rajoy insists that the June 9 deal for up to 100 billion euros ($126 billion) to save stricken banks imposes no new conditions outside of the financial sector itself. But "because of the interconnectedness of the different policy areas, I think that the conditionality should be broad," Wiedmann said. "The impression that this is a rescue with no conditionality outside the financial system is already eroding the commitment to the terms of the existing programmes," he added. The German central bank chief called for an "encompassing solution", with reforms in various areas including budget control in Spanish regions and segmentation of the labour market. Announcing the deal Saturday, finance ministers of the 17-nation eurozone said Spain's commitments on reforms and slashing the public deficit would be closely and regularly reviewed in parallel with the loan. But besides ensuring implementation of those promises, they agreed that the banking rescue loan's conditions "should be focused on specific reforms targeting the financial sector". Spain's declaration that the deal has no new conditions regarding austerity measures or economic reforms has led to pressure for similar terms from other bailed-out eurozone nations. "That is exactly the key problem. There is also a discussion about relaxing the conditionality in Ireland and Portugal, and also in Greece this debate is gaining traction," Weidmann said. "But foot-dragging on addressing the structural problems will perpetuate the crisis, and the market reaction reflects this concern," he added. The central banker believed Spain had hesitated before asking for a eurozone rescue, "hoping that there would be other means of financing with no conditionality attached." Weidmann said the eurozone nations would have to abandon much of their sovereignty over budgets before the region could mutualise its debt, for example by issuing common eurobonds. "And we see how difficult it is to abandon fiscal autonomy, even under enormous pressure it is very hard, for instance for Spain, to subject itself to conditionality. It is perceived as a matter of national pride." The German central banker also showed misgivings over a European plan to launch "project bonds" to finance cross-border infrastructure projects aimed at firing up economies in the region. "Infrastructure? I am not convinced that Spain and other countries suffer from a lack of infrastructure. What I am missing is an adequate analysis. If there is an impediment to investment, for instance in Greece, it is rather too much red tape and inefficient tax system. I don't beleive in further stimulus programmes to cushion the adjustment process," the Bundesbank chief said.