German Chancellor, Angela Merkel

Bloomberg

France is pressing Spain to snub German concerns and request help from the European Union to contain the euro-area financial crisis, according to three people familiar with negotiations.

French officials want Spain to ask the EU’s bailout fund for help to consolidate gains in southern European bonds since European Central Bank President Mario Draghi said the ECB will back up the rescue package by buying unlimited amounts of debt in the secondary market, said the people, who asked not to be named because the lobbying effort is private.

“This is a way for the rest of the Europe to make sure there is no risk of Spain doing what they did in January -- to backtrack on their reforms as soon as deals are done,” said Ricardo Santos, economist BNP Paribas SA in London. “This is constructive tension to make sure Spain will in the end ask for support.”

Bloomberg reports that Spanish Prime Minister Mariano Rajoy, who has been calling for the ECB to buy government bonds since taking office in December, has spent six weeks hesitating since Draghi said Aug. 2 that any aid would have conditions attached. Rajoy yesterday said he may not need a second bailout because the ECB’s pledge already cut borrowing costs. German policy makers say they would force Spain to accept conditions in exchange for support.

“I don’t know if it’s necessary for Spain to ask for it, let’s see how the risk premium evolves in the coming period,” Rajoy told lawmakers in Parliament in Madrid. He will take the decision to protect “Spaniards’ interests” after assessing the conditions, he said.

With Germany’s highest court yesterday clearing the way for the bailout fund, the European Stability Mechanism, to start operating, talks may accelerate. Rajoy is trying to avoid surrendering more control over the economy after handing power over the financial system to the EU in return for a 100 billion- euro ($129 billion) bank rescue. He said this week he won’t allow European officials to dictate spending limits on individual policy areas such as pensions or health care.

“The situation in Spain is not improving, there is really absolutely no benefit in waiting,” Nobel laureate Christopher Pissarides, an economics professor at the London School of Economics, said in an interview with Bloomberg Television yesterday. “There isn’t anything in the pipeline that will ease the situation.”

The French view deeper European aid to Spain as a firebreak that will show investors the effectiveness of the new crisis- fighting plan before markets turn, with Italy and France the next potential targets, the people said. French President Francois Hollande’s rebuff of Germany contrasts with the pro- Merkel line of his predecessor, Nicolas Sarkozy.

Spanish stocks and bonds extended gains yesterday that sent the yield of the 10-year benchmark bond to as low as 5.58 percent. That compares with 7.17 percent before Draghi said on Aug. 3 the bank would buy bonds to stem the crisis and 6.41 percent the day before Draghi detailed the plan on Sept. 6.

European finance chiefs will meet tomorrow in Cyprus with Spain’s view toward aid on the agenda alongside Greece’s ability to qualify for the next installment of its second bailout. Hollande said in Madrid on Aug. 30 that “long-lasting decisions” would be made at an EU summit Oct. 18-19.

France’s position is that any aid request is Spain’s sovereign decision. “It is not up to me to judge,” Hollande said at a joint press conference with Rajoy last month. With Rajoy pushing through austerity measures, “results are already there, but interest rates remain too high on sovereign debt,” said the French leader.

No one is putting pressure on Spain, said an official at the Economy Ministry in Madrid. She asked not to be identified in line with government policy.

French and Italian officials will likely support Spanish arguments that they shouldn’t be forced to take additional measures to lower borrowing and boost growth because their austerity program is already at the limit of what the country can bear, two of the people said.

Rajoy is in the midst of a diplomatic offensive that has seen him meet Hollande, German Chancellor Angela Merkel and Finnish Prime Minster Jyrki Katainen as well as EU President Herman Van Rompuy in the past three weeks. He also plans summit meetings with France and Italy in October.