Germany came up with a solution for the Spanish financial sector yesterday. It proposed a soft bailout through the FROB, which would steer clear of the direction that neither Merkel nor Rajoy are ready to go. The German chancellor never indicated that she didn't want Spain to receive the funding -- Schäuble has offered it several times to De Guindos -- but she is calling for Spain to back the aid.
For his part, Rajoy refuses to give up Spain's sovereignty for the price of 40-90 billion euros, which is what the country needs to stay afloat. Transferring the soft bailout funds to Spanish banks through the FROB looks a lot different than what happened with bailouts in Ireland, Greece and Portugal, particularly if the Spanish government is backing the bailout.
The financing will be made available to banks that need it, and EU conditions will be placed on these banks.
Yesterday, Luis de Guindos looked at the calendar to determine the exact amount Spain will need. And it could be made known later this week when the IMF will present its report on the Spanish financial sector and external auditors issue their findings of the sector's health and accounts standing. Afterward, the government might ask for help.
Why did Merkel agree? For several reasons. The Germans are starting to see how if Spain loses sovereignty via a bailout, this would ostracize the People's Party. And the Socialist Workers' Party has not recovered sufficiently from the November debacle in order to stand in for the PP, which means a political situation akin to what happened in Greece could arise. Further, Merkel has not worked much with Hollande and sees Monti as a technocrat, so she doesn't want to lose Rajoy's political support and face the global ramifications of self-isolating the Germans.
