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Spanish report
by Euro Reporter
2012-07-29 11:36:55
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Spain not to seek bailout fund help

Germany's Finance Minister dismissed reports Spain is about to ask the euro zone bailout fund to purchase its bonds, and talked down fears about its spiralling borrowing costs in an interview with Welt am Sonntag newspaper made available on Saturday. "Spain's financing needs in the short-term are not so high. High interest rates are painful and they create a lot of uncertainty, but it is not the end of the world, if you have to pay a few percent more at a few bond auctions," Wolfgang Schaeuble said.  Asked if there was any truth to speculation that Spain would shortly ask the euro zone rescue fund for help via buying its bonds, Schaeuble answered: "No there is nothing to these speculations." Spanish borrowing costs this week hit euro-era highs as the return investors demanded to hold 10-year bonds soared to 7.78 percent. Yields then fell back below 7 percent on expectation the European Central Bank (ECB) could take bold action, following ECB President Mario Draghi's pledge he would do whatever it takes to safeguard the single currency.

Ten-year yields above 7 percent have proved to be a tipping point leading eventually to bailouts for other countries in the euro zone. Asked about fears that Spain might not be able to sell its bonds Schaeuble said: "We know about these concerns. This is why we tied up an aid package that was sufficiently large. Spain will get up to 100 billion Euros to recapitalise its banks and of this we have made 30 billion Euros in the European Financial Stability Facility (EFSF) available as a potential immediate help."

Schaeuble held talks with Spain's Economy Minister Luis de Guindos in Berlin this week. "[The Spanish government] has taken all necessary decisions and is implementing them. It deserves respect for this... Financial markets have not yet rewarded Spain for these reforms but that will come," Schaeuble said. "You lose trust quickly, but can only restore it over time. Spain needs time. The reform programme will have good effects - also on financial markets," he added. Madrid has launched a fresh 65 billion euro package of tax rises and spending cuts designed to chip away at its debt mountain but it will also probably drive the economy deeper into recession. Spain needs to shift around 38 billion Euros in medium and long-term paper by year-end and about 35 billion in bills. Their average yield so far this year is below 2011.


Spain's outlook remains difficult, vulnerable

The International Monetary Fund said the economic outlook for Spain "remains very difficult and vulnerable to significant downside risks," in a report on the country that published Friday. Officials said it remains critical that Spain maintains "sustained efforts and a clear, credible medium-term strategy for fiscal consolidation, financial sector restructuring and structural reforms." They said the success of this strategy in restoring confidence, jobs and growth "depends critically also on progress at the European level in strengthening the currency union." IMF officials praised Spain's efforts at bringing down the deficit and tackling its banking crisis, but cited the need to continue providing "official support for weak but viable banks, resolve non-viable banks and implement a comprehensive strategy to deal with legacy assets."

The IMF said allowing direct recapitalization for Spanish banks via the European Stability Mechanism would "help break the adverse feedback loops between the sovereign and banks, and have positive spill over effects for the wider euro area." Officials added that quicker progress towards establishing a common supervisory mechanism for euro-area banks would also lift market confidence. IMF directors said Spain should stick to its "agreed fiscal path" and take extra measures as needed, "especially on the revenue side," and use available tools to enhance fiscal discipline, especially at the sub-national level.



Democratic symbol, financial liability

Spain sees the diversity of regions such as Andalucia and Catalonia as a badge of its democracy, but these semi-autonomous lands now look like a financial liability for the whole eurozone, analysts say. With Spanish banks now set for a bail out by the eurozone, concern has switched to the big-spending regional governments, with two of the biggest and most indebted, Valencia and Catalonia, eyeing national rescue funds. Economists warn the eurozone bailout of up to 100 billion Euros ($123 billion) for Spain's banks might not be enough to get the country through the crisis brought on by a collapse of its real estate boom in 2008.

"The position of the regions, which appeared under control at the beginning of the year, has clearly deteriorated," said Cyril Regnat, an analyst at Natixis bank. "Of the 17, about six will ask for help," he added. "You have the regional and banking problems compounding the problems of the state and that explains the particularly violent reaction on the bond markets." The approval of the bank deal on July 20 failed to rally financial markets and Spain's sovereign interest rates rose when Valencia and Catalonia indicated they would tap the central government's 18-billion-euro regional rescue fund. The southeastern region of Murcia has indicated it too will turn to the fund to borrow between 200 and 300 million Euros. "Castilla-la-Mancha will have to ask for it too. So will Andalucia, possibly the Balearic Islands and possibly Asturias" before long, said Emilio Gonzalez, an economics professor at Madrid Autonomous University.

His outlook was dimmer than Regnat's. Eventually, "with the exception of the Madrid region and possibly Aragon, practically all of them will," he added. Financial pressure from the indebted regions, who control big public budgets for services such as health and education, poses a threat to the country's overall stability. "The problems of the regions make it more likely that Spain needs a full sovereign bail-out," said analyst Christian Schulz of German bank Berenberg. At the end of March 2012, Spain's regions had outstanding debts of 145 billion Euros, equivalent to 13.5 percent of the country's total output. Analysts say October represents a crunch deadline for Spain, when a big slice of its debt comes due for repayment.

They say Spain will likely need to seek a full international bailout and warn that market anxiety about its financial stability could infect Italy and the rest of the eurozone. "The eurozone is currently particularly vulnerable, as it is unclear how it could put together a rescue package quickly," Schulz warned. "Europe may have enough resources to save Spain, but if the uncertainty persists, the pressure to Italy could intensify." Credit rating agency Fitch said Spanish regions need 16 billion Euros to service their debts and deficits over the next six months. Valencia, Catalonia and Murcia together need about nine billion to the end of 2012. During Spain's construction-driven boom decade, certain regions spent lavishly, building housing blocks and airports that now stand empty.


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