See here for Rome presentation.

Comments welcome!

(Mario Draghi may be on the panel with me)

Only with fixed fx, where ‘money creation’ is better described as ‘deficit spending’.

Shame shame shame.

ECB’s Weidmann Says Unlimited Money Creation Risks Inflation

By Jeff Black and Jana Randow

September 18 (Bloomberg) — Bundesbank President Jens Weidmann said central banks that promise to create unlimited amounts of money risk fueling inflation and losing their credibility.

In a ceremonial speech in Frankfurt today, Weidmann, who opposes the European Central Bank’s plan to spend unlimited amounts on government bonds, spoke of the responsibilities that central banks have to preserve the value of money.

“If a central bank can potentially create unlimited money from nothing, how can it ensure that money is sufficiently scarce to retain its value?” he asked. “Is there not a big temptation to misuse this instrument to create short-term room to maneuver even when long-term damage is very likely? Yes, this temptation is very real, and many in the history of money have succumbed to it.”

While Weidmann didn’t directly address ECB policy, he is the only central bank governor from the 17 euro nations to publicly oppose ECB President Mario Draghi’s plan to help curb the borrowing costs of member states engulfed by the region’s debt crisis. Weidmann, who has warned the bond-buying policy is tantamount to financing governments, said today that central banks were given independence to ensure the power to create money couldn’t be abused by politicians.

“If one looks back in history, central banks were often created precisely to give the monarch the freest possible access to seemingly unlimited financial means,” Weidmann said. “The connection between states’ great financial needs and a government controlling the central bank often led to an excessive expansion of the money supply, and the result was devaluation of money through inflation.”

‘Extraordinary Privilege’

The independence of central banks is an “extraordinary privilege” and not an end in itself, he said.

“The independence serves much more to establish with credibility that monetary policy can concentrate without hindrance on keeping the value of money stable,” Weidmann said. “The best protection against the temptations inherent in monetary policy is an enlightened and stability-oriented society.”

Weidmann’s speech forms part of a series of events in Frankfurt on the theme of money in the works of Johann Wolfgang von Goethe.

Over 6 weeks ago we distributed the attached Eurosystem Solutions paper.

It described the unique non-standard measures being used for by the Eurosystem and ECB to address bank solvency and national solvency issues and the movement towards a real solution involving the ECB.

Now the ECB has announced what is very close to the real solution: unlimited bond purchases.

Regardless of conditionality, or even in spite of conditionality, this is the crossing of the line into the notion that there is an entity that can credit accounts in Euro in unlimited amounts.

While conditionality is the apparent necessary circumstance, and it’s likely national authorities will play along, these ECB purchases will have to take place regardless of conditionality. If Spain says they can’t comply, is the ECB going to let them default? The ECB has done all this to avoid Spanish default.

The best case is for the markets to recognize the ECB backstop and so regular purchases aren’t very necessary. There will be lots of movement towards coordination of budgets and banking supervision.

But the ECB line has been crossed.

Sixteen years after our AVM/III July 1996 Bretton Woods conference that identified the severe credit problems with the looming Maastrict rules (1/1/99), and eleven years after Warren’s famous paper on the potential European credit crisis “The Rites of Passage” we are finally seeing the necessary repair to the EMU.

There still remain political obstacles, court challenges and the like, but the imperatives to avoid a complete collapse of the Euro financial system have driven virtually all the important constituents to this necessary path of solution.

>   
>   (email exchange)
>   
>   ”To sterilize the bond purchases, the ECB will remove from the system elsewhere the same
>   amount of money it spends, ensuring the program has a neutral impact on the money
>   supply.”
>   
>   blimey…
>   

ECB Plan Said to Pledge Unlimited, Sterilized Bond-Buying

>   
>   (email exchange)
>   
>   On Wed, Aug 22, 2012 at 3:02 AM, wrote:
>   
>   You are totally right about him, I sent you a word doc with his exact words
>   (emphasis mine)
>   

Repeat: Asmussen: ECB Wants To Eliminate Doubts About Euro
2012-08-20 05:36:05.371 GMT

–First Ran On Mainwire At 2257 GMT/1857 ET Sunday


FRANKFURT (MNI) – The European Central Bank wants to remove any doubt about the permanence of the common currency, ECB Executive Board member Joerg Asmussen said in a newspaper interview published in Monday’s edition of the German daily Frankfurter Rundschau.

The German board member told the paper that financial market certainty regarding the continued existence of the euro was a necessary condition for the currency’s stability.

The ECB’s planned new bond-buying program is superior to its predecessor, the Securities Market Program, and the Governing Council will work on details at its next meeting, Asmussen said.

Noting the high risk premia for some sovereign bonds in the euro area, which he said were in part due to concerns about the reversibility of the euro, Asmussen said that such an exchange rate risk was theoretically not admissible in a currency union and was leading to the incomplete transmission of ECB monetary policy to some euro area economies.

“Our measures attempt to repair this defect in the monetary policy transmission mechanism,” he said. The worries about the euro’s permanence are no wonder, he added, given “how carelessly” the currency is talked about in Europe.

“It is precisely these concerns about the continued existence of the euro that we want to rid market participants of,” he said.

Asmussen asserted that the ECB is acting within its mandate, adding that “a currency can only be stable if there is no doubt about its existence.”

The new bond-buying program meant to address this issue “will be better conceived” than the SMP, he said, repeating that the ECB will only act in tandem with the EFSF or ESM and that interested countries must submit a request and satisfy “comprehensive economic policy conditions.”

The ECB’s Governing Council “will decide in complete independence whether, when and how bonds are purchased on the secondary market,” he added.

What happened last summer with Italy, which failed to use the time bought by ECB bond purchases to make necessary adjustments, cannot be allowed to happen again, he said.

Moreover, in the new program the ECB will deal with the problem of senior status, which interferes with affected countries’ return to capital markets because private investors fear being disadvantaged vis-a-vis the ECB, he said.

Asked if the new program could be successful because it will be unlimited in time and scope, Asmussen confirmed that ECB President Mario Draghi had said as much.

“But wait and see,” he said. “We are working on the design of the new program and will occupy ourselves with these questions in our next meeting.”

Credit and money growth in the euro area are “moderate,” and “inflation expectations in the entire Eurozone are firmly anchored to our target,” he said. “We are monitoring price developments very closely and have all the necessary instruments to fight possible inflationary dangers effectively and in a timely manner.”

Karim writes:

As background, note Asmussen was a Merkel appointee and had no prior affiliation with the Bundesbank.
See professional career here.

A mixed bag.

It addresses the solvency issue and can bring rates down to whatever the ECB wants them to pay.

But the ‘conditionality’ likely continues the contractionary bias it’s already introduced.

If pressed as implied, this is a prescription for rising unemployment and political turmoil.

The euro zone has massive ‘demand leakages’ into pension funds, corporate reserves, cash in circulation,
the desire of foreign governments to hold euro balances, etc. that are a powerful contractionary bias.

They can only be offset by deficit spending by the domestic private sector, the foreign sector (net exports)
or the euro zone public sector entities.

In my humble opinion
nothing less than full public sector recognition of this ‘accounting identity’
is a necessary prerequisite to a constructive response.

ECB Says It May Buy Bonds If Strict Conditionality Ensured

 
Aug. 9 (Bloomberg) — The European Central Bank said it may intervene in bond markets in tandem with Europe’s bailout funds if troubled nations commit to improving their economies and fiscal positions.

 
“The adherence of governments to their commitments and the fulfilment by the European Financial Stability Facility/European Stability Mechanism of their role are necessary conditions,”

 
the Frankfurt-based ECB said in its monthly bulletin today, echoing President Mario Draghi’s remarks on Aug. 2. The central bank “may undertake outright open market operations of a size adequate to reach its objective.”

 
The ECB is stepping up its crisis response after Spanish and Italian bond yields surged, exacerbating a sovereign debt crisis that has forced five of the 17-euro members into seeking external aid. Draghi last week justified any potential intervention, saying rising borrowing costs in “several countries and financial fragmentation hinders the effective working of monetary policy.”

 
Still, “in order to create the fundamental conditions for such risk premia to disappear, policy makers in the euro area need to push ahead with fiscal consolidation, structural reform and European institution-building with great determination,”

 
the ECB said. “Governments must stand ready to activate the EFSF/ESM in the bond market when exceptional financial market circumstances and risks to financial stability exist — with strict and effective conditionality.”

 

Market Tensions

 

A further worsening of the crisis is likely to hurt economic growth in the euro area, “with the ongoing tensions in financial markets and heightened uncertainty weighing on confidence and sentiment,” the report said.

 
Today’s bulletin also contains the quarterly survey of professional forecasters. Their estimate for 2012 inflation remained unchanged at 2.3 percent. For 2013, they expect annual price gains to average 1.7 percent, down from 1.8 percent previously estimated, and for 2014 they predict 1.9 percent. The longer term inflation forecast remained at 2 percent.

 
On growth, the forecasters predict a 0.3 percent contraction for 2012, down from a 0.2 percent contraction expected last quarter. For 2013, they anticipate growth of 0.6 percent, down from a previous estimate of 1 percent. For 2014, they see the economy expanding 1.4 percent.

Karim writes:

ECB’s Hansson Says Germany Can Be Outvoted on Governing Council

By Ott Ummelas

August 3 (Bloomberg) — European Central Bank policy maker Ardo Hansson, who heads Estonia’s central bank, said Germany c be outvoted on the ECB’s Governing Council.

“There are 23 members in the council and if there will be a vote then everyone’s vote has the same weight in the sense that some questions are solved by a majority,” Hansson told Eesti Rahvusringhaaling radio today when asked if new ECB bond purchases can be approved without German support.

While there was unanimity on the council to investigate options in the coming month, “there could be differing views of details and these would need to be solved in negotiations,” Hansson said. He also said purchases will focus on “relatively short-term debt instruments.”

Not to forget this is the just the beginning of ‘doing what it takes’ to sustain the euro, and make it ‘safe’ for investors.

That’s all inclusive, though not necessarily immediate.

And ‘anchoring’ the short end ‘automatically’ goes a very long way towards anchoring the long end with regard to risk premium.

Karim writes:

Relative to levels before Draghi’s London speech last week, Spanish 2y yields are 200bps lower, and 10yr yields are 50bps lower.

An interesting move by the ECB would be to offer short to medium term notes in the market place.

As discussed over the years, unlike other currencies, the euro has no ‘risk free deposits’ available to anyone other than member banks and foreign governments.

This has probably caused substantial numbers of investors to sell their euro for other currencies rather than hold any of the available euro denominated financial assets.

If so, ECB notes could mark the return of these portfolio to ‘normal’ allocations to euro denominated financial assets, which would offer strong support for the euro vs other currencies.

And with the ECB measuring success by the strength of the euro, this could be an attractive proposition.

It would attract euro deposits from the banking system, which the ECB can easily accommodate by continuing its current policy of liquidity provision for its member banks as needed.

Additionally, and not that it actually matters for inflation, lending, aggregate demand, etc., most monetarists would not include these notes as part of the ‘money supply’ but instead as an anti inflationary ‘sterilization’ measure.

Note that past remarks indicate the euro leaders equate ‘success’ with ‘strong euro’, particularly the ECB, with its single mandate.

So with the euro reacting positively to Draghi’s ‘pledge’, which came after a decline in the euro, more of same is encouraged.

Eurogroup chair sees decisions soon in debt crisis

By Geir Moulson

July 29 (AP) — The German and Italian leaders issued a new pledge to protect the eurozone, while the influential eurogroup chairman was quoted Sunday as saying that officials have no time to lose and will decide in the coming days what measures to take.

The weekend comments capped a string of assurances from European leaders that they will do everything they can to save the 17-nation euro. They came before markets open for a week in which close attention will be focused on Thursday’s monthly meeting of the European Central Bank’s policy-setting governing council.

Last Thursday, ECB President Mario Draghi said the bank would do “whatever it takes” to preserve the euro — and markets surged on hopes of action.

German Chancellor Angela Merkel and Italian Premier Mario Monti “agreed that Germany and Italy will do everything to protect the eurozone” in a phone conversation Saturday, German government spokesman Georg Streiter said, a statement that was echoed by Monti’s office.

That was nearly identical to a statement issued Friday by Merkel and French President Francois Hollande, which followed Draghi’s comments.

This is from Pavlina’s paper for those of you tracing origins of MMT euro discussion:

Link here.

Notice how in private correspondence Mosler applies the same logic in analyzing the ramifications of the restrictions on deficit spending in the current plan for European Monetary Union:

Operating factors will require reserve adds and drains to keep the system in balance and maintain control of the interbank rate. However, the ECB is able only to act defensively, like all CBs [Central Banks]. It cannot proactively lend Eurosa reserve add, without an offsetting drain. The deficit spending I refer to is needed to offset the need of the private sector to be a net nominal saver in Euros. In the currently proposed system, even the increasing demand for currency in circulation must be accommodated via collateralized loans from the ECB. Net nominal wealth of the system cannot increase. The private sector demand for an increase in net nominal wealth will have to be from the reverse happening at the member nation level. If member nations are restricted from doing this [to deficit spend], a vicious deflationary spiral will result. (Mosler, 1996)

The Economics of Eurozone Trade Differentials and Fiscal Transfers

Trade differentials have been blamed for the euro crisis, implying that that if trade had some how been balanced there wouldn’t have been the kind of liquidity crisis we’ve been witnessing.

While I do recognize the trade differentials, it remains my deduction that the source of the ongoing liquidity crisis is the absence of the ECB (the only entity not revenue constrained) in critical functions, including bank deposit insurance and member nation deficit spending. And I continue to assert that the euro zone liquidity crisis is ultimately obviated only by the ECB ‘writing the check’, as has recently indeed been the case, however reluctantly.

Trade issues within the euro zone, however, will remain a point of economic and political stress even with a full resolution of the liquidity issues, which leads to discussions of fiscal transfers.

Fiscal transfers can take two forms. One is direct payments to individuals, such as unemployment compensation. Another is the placement of enterprises in a region.

The US does both. For example, it funds unemployment compensation and also spends to directly support all federal agencies, including contracting private sector agents for goods and services to provision the federal govt and its agencies.

And here’s where mainstream economics has left out a critical understanding. In real terms, the allocation of the production of goods and services to a region is a real cost to that region.

This is because that region has to supply its labor to the production of output that is directed to the public sector for the mutual benefit of all the regions.

Note that this is not the case with the likes of unemployment compensation, where the payment is made without any ‘real output’ transmitted to the public sector.

For the euro zone, this means that if Germany, for example, located a military production facility in Greece, where Germany got the benefit of the output, in ‘real terms’ Greece would be ‘paying’ for Germany’s military.

This type of thing could work to readily ‘balance’ euro zone trade, at the real expenses of the ‘deficit’ nations.

Which is exactly what happens in the US, for example, when a military procurement expenditure is located in a region of high unemployment.

And yes, I fully appreciate the obstacles to this actually happening, including deficit myths that prevent full employment and politics that need no further discussion, so thanks in advance for not telling me about them!

But the point remains- the trade differentials in the euro zone are not in the least an insurmountable problem, at least not in theory…

Seems to me if there was going to be a liquidity problem with the banks the ECB would have already let it happen:

Spanish Banks’ Net ECB Loans Leap to Record 337 Billion Euros

By Emma Ross-Thomas

July 13 (Bloomberg) — Spanish lenders’ net borrowings from the European Central Bank jumped to a record 337 billion euros ($411 billion) in June. Net average ECB borrowings climbed from 288 billion euros in May, the Bank of Spain said. Gross borrowing was 365 billion euros, up from 325 billion euros in May, and accounting for 30 percent of gross borrowing in the whole euro region. Spain saw the biggest outflow of foreign investment in April since the start of the euro, Bank of Spain data show. Non- residents cut their holdings of Spanish bonds to 37.5 percent of the total in May, from 51.5 percent at the end of last year. Spanish banks picked up the slack in the first quarter, before starting to reduce their holdings in April, according to Treasury data.

More possible hints that deficits may be large enough to support stability

A little better than expected:

Euro-Area Manufacturing Contracted for 11th Month in June

By Mark Deen

July 2 (Bloomberg) — Euro-area manufacturing output contracted for an 11th straight month in June as Europe’s debt crisis sapped demand across the continent.

A gauge of euro-region manufacturing held at 45.1 in May, London-based Markit Economics said today in a final estimate. That compares with an initial estimate of 44.8 on June 21. A reading below 50 indicates contraction.

A little better than expected:

Italian May Unemployment Rate Declines for First Time in a Year

By Chiara Vasarri

July 2 (Bloomberg) — Italy’s jobless rate unexpectedly fell from a 12-year high in May, the first decline in more than a year.

The unemployment rate decreased to a seasonally-adjusted 10.1 percent, from 10.2 percent in April, Rome-based national statistics office Istat said in a preliminary report today. It was the first decline in the jobless rate since February of last year. Economists forecast an increase to 10.3 percent, the median of eight estimates in a Bloomberg News survey showed.

Joblessness among people aged 15 to 24 rose to 36.2 percent, from 35.3 percent, Istat said.

Better than expected improvement here:

U.K. CIPS Manufacturing Shrank for Second Month in June

By Jennifer Ryan

July 2 (Bloomberg) — U.K. manufacturing shrank for a second month in June as demand “remained weak,” Markit Economics said.

A gauge of factory output was at 48.6 from 45.9 in May, Markit said on its website today. The median estimate in a Bloomberg News survey of 25 economists was 46.5. A reading below 50 indicates contraction.

Some ok Swiss news as well.

Also, sufficient progress at the EU level to give the ECB cover to write checks as needed to get from here to any of the prospective EU measures.

This includes taking forever to get from here to there.

They all seem to understand that the ECB is at least one answer to the solvency issue, and seem to be willing to allow the ECB to provide bank liquidity while they try to finalize an alternative solution. Indirectly that means, at least for now, the member governments will be able to make their payments for the immediate future.

So as previously discussed, they solved the solvency issue, and markets have responded, which leaves them with a bad economy to focus on.

With deficits now perhaps large enough for stability, and maybe a bit of modest GDP growth, I’d at best expect a ‘wait and see’ attitude from an EU that has found it highly problematic to act even in an emergency.

And no business disruption:

Spanish Banks’ Net ECB Loans Jump to Record 288 Billion Euros

By Charles Penty and Emma Ross-Thomas

June 14 (Bloomberg) — Spanish lenders’ net borrowings from the ECB jumped to a record 287.8 billion euros ($361.4 billion) in May, highlighting the thirst of the financial system for funding before the country’s banking bailout.

Net average ECB borrowings climbed from 263.5 billion euros in April, the Bank of Spain said on its website today. Gross borrowing was 324.6 billion euros in May, up from 316.9 billion euros in April.

Spain on June 9 became the fourth euro member to seek a bailout since the debt crisis began almost three years ago, asking for as much as 100 billion euros to rescue lenders pummeled by a real estate slump now in its fifth year.

The increase in ECB borrowings “conveys the severity of the predicament some banks found themselves in ahead of last week’s bailout,” Martin van Vliet, an economist at ING Bank in Amsterdam, said in an e-mailed comment. “Now that concerns about the solvency of Spain’s banks will be addressed, financing difficulties should gradually start to ease. But we should expect the Spanish banking system to remain heavily dependent on central bank funding for quite some time.”

The net amount subtracts the average amount parked by Spanish banks at the overnight deposit facility, van Vliet said.

If this holds, as previously discussed, some growth can return, albeit from currently depressed levels, as the austerity pushed down GDP and pushed up the deficit to the point where the deficit becomes sufficiently large to support things.

Monti Rules Out More Austerity Measures for Italy

June 13 (Bloomberg) — Italian Prime Minister Mario Monti’s government is not planning to adopt further austerity measures going forward, Pierferdinando Casini, the leader of the Union of Centrists party, told reporters in Rome today.

Casini, together with Pier Luigi Bersani and Angelino Alfano, the leaders of the Democratic Party and of the People of Liberty party respectively, met with Monti last night to discuss the European economic crisis. The three leaders pledged to back the government’s reforms that are now in parliament, according to a statement from Monti’s office.

“Nor the parties, nor the government are willing to plan a further budget adjustment although the situation has become very negative” also in light of the earthquake, which “will be a blow for public finances,” Casini said.

From Dave Vealey:

On April 17 the EFSF made a 25 bb loan to the Hellenic Financial Stability Fund (HFSF) guaranteed by the Greek government. The HFSF used these funds from the EFSF to buy 25 bb EUR of 6-10 yr EFSF FRN MTN bonds.

On May 28th, 18 bb of the 25 bb EFSF bonds were sold to the Greek banks by the HFSF in return for convertible bonds or new shares in the bank.

The EFSF bonds are eligible collateral at the ECB and are thought to have been used to replace previous ELA borrowings by the same Greek banks.

This operation gives the Greek banks capital plus improved funding with the Greek government ultimately liable for the initial loan from the EFSF. However, no EFSF bonds were needed to be issued to the market. Effectively the ECB financed the Greek banking systems recapitalization.

The total amount set aside by the EFSF for Greek bank recapitalizations is 48 bb euro.

A similar structure could likely be done in Spain:

ESM makes a loan to the FROB (loan gtd by Spanish govt) to buy ESM bonds
The FROB buys ESM bonds
The FROB then sells the ESM bonds to banks in return for convertible bonds or common stock ownership in the bank
The Spanish bank then has a capital injection and the ability to post ESM bonds at ECB for funding

This avoids in theory at least, the ECB directly bailing out the Spanish banking system

Reads like a well conceived proposal, as, following Trichet a couple of weeks ago, more and more proposals emerge that actually make operational sense:

Spain wants euro zone fiscal authority

June 2 (Reuters) — Spain called on Saturday for a new fiscal euro zone authority which would harmonize national budgets and manage the block’s debts.

Prime Minister Mariano Rajoy said the authority was the answer to the European debt crisis and would go a long way in alleviating Spain’s woes as it would send a clear signal to investors that the single currency is an irreversible project.

It is not the first time a European leader has proposed creating such an authority but the woes and the size of Spain – a country deemed too big to fail – may now accelerate talks ahead of a EU summit on June 28-29.

The prospect of a Greek euro exit and Spain’s parlous finances have prompted EU policymakers to hurriedly consider measures such as a “banking union”.

Germany, the paymaster of the euro zone, and others insist such a move can only happen as part of a drive to much closer fiscal union and relinquishing of national sovereignty.

Overspending in the regions and troubles with a banking sector badly hit by a property crash four years ago have sent Spain’s borrowing costs to record highs and pushed the country closer to seeking an international bailout.

The risk premium investors demand to hold Spanish 10-year debt rather than German bonds rose to its highest since the launch of the euro – 548 basis points – on Friday.

The Spanish government, which has hiked taxes, slashed spending, cut social benefits and bailed out troubled banks, argues that there is little else it can do and the European Union should now act to ease the country’s liquidity concerns.

In private, senior Spanish officials have said this could be done by using European money to recapitalize directly ailing banks or though a direct intervention of the European Central Bank on the bond market.

They have also said the euro zone should quickly move towards a fiscal union to complete its 13-year monetary union but Rajoy went a step further by making a formal offer.

“The European Union needs to reinforce its architecture,” Rajoy said at an event in Sitges, in the north-eastern province of Catalonia. “This entails moving towards more integration, transferring more sovereignty, especially in the fiscal field.

“And this means a compromise to create a new European fiscal authority which would guide the fiscal policy in the euro zone, harmonize the fiscal policy of member states and enable a centralized control of (public) finances,” he added.

NO TABOOS

He also said the authority would be in charge of managing European debts and should be constituted by countries of the euro zone meeting strict conditions.

Earlier this week, ECB President Mario Draghi said EU leaders should break away from the incremental approach that has failed to get ahead of the euro zone debt crisis for more than two years and quickly clarify their vision for the future of the currency.

Adding to growing pressure for dramatic policy action at this month EU leaders’ summit, he warned that the Central Bank could not fill the policy vacuum.

The set-up of the new authority would require a change in the European Union treaties, a usually lengthy and politically painful process which requires ratification in the 27-member states of the bloc.

Germany has said further integration in Europe was required, including additional controls on national public finances, and was ready to consider revising the treaties if needed.

German chancellor Angela Merkel said there should be no taboos when discussing these questions.

A day after Berlin supported giving Spain an extra year to cut its deficit down to the 3 percent of GDP threshold, Merkel said it should be possible for countries that violate fiscal rules to be sued in the European Court of Justice.

BANKING UNION

Merkel also praised higher German wage deals and signaled flexibility on a financial transaction tax, in a sign she is open to new measures to boost growth in Europe.

The comments, at a conference of her Christian Democrats (CDU) in Berlin, show that she is ready to heed calls for Germany to do more for growth but wants other euro states to accept giving up sovereignty over their budgets in exchange.

“You can’t ask for euro bonds, but then not be prepared to take the next step towards closer integration,” she said. “We won’t be able to create a successful currency together this way.”

With the debt crisis now centered on Spain’s teetering banking sector, talks are also under way on creating a banking union in the euro zone based on a centralized supervision, a European deposit scheme and a central fund that would cope with failed lenders.

Germany’s finance ministry said on Friday it was willing to consider this option in a mid-term perspective.

Rajoy backed the idea on Saturday. He also said that the government would explain before the end of June how it will recapitalize Spain’s troubled banking sector, which is currently being reviewed by independent auditors.

Spain has picked the “Big Four” accounting firms KPMG, PwC, Deloitte and Ernst & Young to carry a full, individual audit of its ailing banks, a source with knowledge of the decision told Reuters on Saturday.