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Spanish aid request expected in November

Source: Reuters - Sat 13th Oct 2012
Spanish aid request expected in November

Spain could ask for financial aid from the euro zone next month and if it does the request would likely be dealt with alongside a revised loan programme for Greece and a bailout for Cyprus in one big package, euro zone officials said.

The Spanish government is considering the conditions of such a rescue package and has said it would take a decision only once it has more clarity on the conditions and the scope of the aid.

Spain replaced Greece, Ireland and Portugal as the main focus in the euro zone debt crisis earlier this year after its crippled banks, highly-indebted regions, a second recession in 3years and soaring debt unnerved investors.

Since then, the country's borrowing costs have reached levels deemed unsustainable in the long run, raising the prospect of a 2nd aid programme for Madrid following the €100-billion lifeline it obtained for its banks in June.

"We're moving, we're taking steps, we're preparing it, things will crystallise in November," said a senior official who is directly involved in talks about a potential Spanish aid.

The official spoke on the condition of anonymity because of the sensitive nature of the discussions.

Asked to clarify if this meant an aid request was expected in November, he said : "I am confident this will happen then, in November."

A 2nd senior source also pointed to November as the most likely time for a move from Madrid.

"If I had to bet, it would rather be in November than in October, if ever. Then it would be a package - you would have Greece and Cyprus and Spain. I think not Slovenia," one senior euro zone official said.

Spain has enough money to survive a redemption peak towards the end of October when it would need to pay back €29.5 billion worth of debt.

But, eventually, it would need to borrow at more sustainable rates than the current level near 5.8-6% at which the benchmark 10-year paper trades.

A Spanish government official said the Treasury was fully funded until the end of the year. "We could even stop issuing debt," the official said.

But January looks challenging with Spain's deficit targets likely missed, additional funding needs created by falling tax revenues and support to indebted regions and a refinancing hump of €19 billion that month.

The situation will not get better through the year with Spain's gross debt needs reaching €207 billion in 2013 compared to €186 billion in 2012.

Pressure is growing on Spain to apply for financial help from the euro zone's permanent bailout fund, the European Stability Mechanism (ESM), because this would allow the ECB to step in with massive Spanish bond purchases on the secondary market, that would lower Madrid's borrowing costs.

TALKS CONTINUE

Privately other senior officials agreed a request from Madrid was probably inevitable.

"It is not helpful that Spain is waiting. We have a framework and they would be better off, safer, if they would use that framework. It is a bit of a loss of time," a third senior euro zone policy-maker said.

While Spanish policies were generally on the right track, it was dangerous to defy market expectations that the ECB would be able to buy Spanish bonds.

"I would expect them to ask. It is not a question of policy-making in Spain. It is a question of market dynamics. Now that the framework has been announced, it has to be used," the official said.

He said Spain was delaying the request because it had engaged into a game of chicken with Germany and other countries.

Behind the scenes, however, talks continue about the form a programme would take.

EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview on Friday that, were Spain to ask for help, it would most likely use a precautionary credit line, money from which could be used to buy bonds at primary auctions.

ECB Executive Board Member Benoit Coeure, also in an interview with Reuters on Friday, said the ECB could start buying Spanish bonds even if the ESM did not disburse a cent to Spain.

All Madrid had to do was sign a memorandum of understanding with the ESM on the conditions of aid and agree that the IMF would monitor the implementation of the agreed reforms with quarterly reports, Coeure said.

This would be welcome news to euro zone governments which do not want to heap more financial burdens on their taxpayers, who have already guaranteed loans to Greece, Ireland and Portugal as well as a bank bailout for Spain.