German parliament poised to OK Spanish bank aid

German MPs were to approve an aid package of up to 100 billion euros ($122 billion) for Spain's debt-mired bank sector on Thursday, despite a small rebellion in Chancellor Angela Merkel's own party.

Merkel said in the run-up to the vote that "from what I am hearing, I am optimistic" that MPs would approve the rescue package that aims to prevent the banking sector pulling recession-wracked Spain further into the abyss.

German deputies were hauled back from their summer holidays for the special parliamentary session, the 10th vote in two years on emergency eurozone action.

Thursday's vote is also urgent as Madrid hopes to sign the formal agreement with eurozone finance ministers on Friday.

Opening the debate, Finance Minister Wolfgang Schaeuble said "today is about giving Spain the necessary time to solve its banking problems.

"In this exceptional situation, we are helping the Spanish state to battle against the overblown nervousness of the financial markets and we are therefore making our contribution to the overall financial stability of the eurozone."

A handful of Merkel's governing centre-right coalition were expected to vote against the package but it was virtually certain to pass as the opposition Social Democrats have pledged their support.

"We always get the majority we need," Merkel said earlier in a weekend television interview.

Spain is hoping to get a first slice of 30 billion euros by the end of the month and has in turn agreed to a raft of banking sector reforms and EU inspections to ensure the restructuring process is effective.

Demonstrating the urgency of the rescue, a Spanish bond auction earlier Thursday resulted in sharply higher borrowing costs and lower demand, pushing rates on the secondary market up towards the seven-percent level seen as unsustainable.

The debate in Germany, which as Europe's top economy is putting up nearly 30 percent of the loans, has revolved around who is responsible for the guarantees.

EU leaders agreed at a summit last month that money from their permanent bailout fund could be used directly to finance banks but only once a comprehensive Europe-wide oversight body, probably the European Central Bank, was in place.

However, Berlin has insisted that until then, the Spanish government is responsible for the loans -- and for ensuring they are repaid.

"Spain makes the application, Spain gets the money to recapitalise its banks and Spain is liable as a country for the aid," Schaeuble stressed.

Analysts seemed broadly relaxed about the parliamentary vote.

"We expect the Spanish programme to be agreed ... paving the way for formal approval ... on Friday," said economists at French bank Credit Agricole in a research note.

Opposition from within Merkel's ranks can "to some extent be explained by domestic political considerations," they added.

Economists are eyeing what could be bigger speed bump on the road towards saving the euro on September 12, when Germany's top court rules on whether the eurozone's 500-billion-euro rescue fund can be passed into law.

The Constitutional Court is to hand down its judgement on a raft of challenges to the permanent European Stability Mechanism and the EU's fiscal pact after Germany's president withheld his signature, delaying their entry into force.

Observers expect the court to allow the key crisis tools to pass but may insist that Germany's parliament have a greater say in future rescue action, meaning Thursday's emergency vote is unlikely to be the last, analysts said.
 

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