Thousands of people took to the streets of Madrid today to protest the government's punishing austerity measures.
Credit: Denis Doyle

BRUSSELS, Belgium — Euro zone finance ministers activated a $650 billion firewall fund Monday, then promptly concurred that the country seen as the mostly likely candidate for a rescue didn't need the bailout money.

"The Spanish don't need an assistance program,” said German Finance Minister Wolfgang Schauble on arriving for the meeting in Luxembourg. “That is what the government says over and over again and we should just trust the Spanish government."

Spain's borrowing costs have come down from their dangerous pre-summer high, prompting ministers to suggest the government's budget cuts and market reforms have reduced the risk that it will need to call on the new European Stability Fund.

"Spain is taking important steps that are going in the right direction," Italian Finance Minister Vittorio Grilli said.

"Spain doesn't at this moment need any help," Luxembourg's minister Luc Frieden echoed. "The Spanish government is undertaking reforms that go in the right direction."

Spain will get money from the new fund for its banking sector, which has been hobbled by a crisis in the real estate market. It's expected to request around $50 billion.

But the government has resisted making a request for help to further bring down its borrowing costs. Madrid fears its euro zone partners could insist on yet more austerity measures as a condition.

"Spain has to do its part and we will do everything about the public deficits and the economic reforms," Spanish Finance Minister Luis de Guindos said.

However, many believe deepening recession, record unemployment and mounting public discontent will eventually force Madrid to seek help.

Tens of thousands of people marched over the weekend to protest tough government spending cuts they say will only increase unemployment and deepen the country’s second recession in three years.

Trade unions have threatened to call a general strike, possibly in November, unless Prime Minister Mariano Rajoy’s center-right government holds a referendum on the unpopular austerity measures.

The ESM’s launch is several months late, largely due to a legal challenge in Germany, Europe’s largest economy that will have to chip in more than a quarter of the funds.

The German parliament's long-delayed approval of the fund, along with the European Central Bank's commitment to back it up with purchases of troubled countries' bonds, have been major factors for calming markets in recent weeks.

All euro zone countries will begin paying into the fund this week. The ESM will have an initial firepower of $260 billion that will rise to its full $650 billion strength over the next 18 months, the fund's managing director Klaus Regling told a news conference in Luxembourg.

"The start of the European Stability Mechanism marks a historic milestone for the European monetary union," declared Luxembourg’s Prime Minister Jean-Claude Juncker, who heads the ESM board of governors. "The euro area is now equipped with an effective firewall."

The ratings agencies Moody's and Fitch gave the ESM their top AAA rating, although Moody's saw the risk of a "negative outlook."

The ministers also discussed Greece. The government in Athens is hoping they will endorse its new $17 billion package of budget cuts.

Juncker said the country had made "admirable" efforts, but still needed to implement a raft of reforms in the coming weeks to free up the next $41 billion slice of bailout funding the country needs to keep its banking sector operative.

Euro zone officials are skeptical the money can be cleared in time for an EU summit next week, as Greece hopes.

"There is progress on the ground, [but] more needs to be done, on all fronts," IMF Managing Director Christine Lagarde said in Luxembourg.

Meanwhile, the Greek authorities are launching a massive security operation in Athens ahead of a rare visit by German Chancellor Angela Merkel on Tuesday.

Some 7,000 police will be deployed to shut down much of the city center and enforce a ban on demonstrations. Many Greeks blame Merkel for prolonging Greece's economic misery.

Greece, along with Portugal and Ireland, receives bailout money from an earlier euro zone firewall fund that was designed to be temporary and which the ESM will replace.

Juncker praised Portugal's reform efforts, which have paved the way for it to receive its next $5.6 billion tranche of bailout funding. 

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