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Expectations of Spain needing EU bailout slide

Source: Reuters - Fri 19th Apr 2013
Expectations of Spain needing EU bailout slide

Spain's success in raising funds from the market in the last few weeks has led to far fewer economists expecting it to need a sovereign bailout, a Reuters poll showed on Friday.

Only 7 of the 49 respondents said Spain would need help, down sharply from the 16 out of 48 who said it would in a March 27 poll.

Slovenia, however, is expected to have to turn to the EU and IMF.

Twenty-six economists said it would need a bailout, compared with 16 in the earlier poll.

Since the March survey, Spain has had two auctions of government bonds that drew strong demand from investors, pushing down borrowing costs to their lowest since 2010.

Kristian Toedtmann, senior economist at DekaBank in Frankfurt, said the probability that Spain would need a bailout beyond what it has already been granted for its banking sector was less than 50%.

He said a big reason for this was the ECB's pledge to buy bonds of troubled countries through its Outright Monetary Transactions (OMT). This has acted as a backstop and calmed European financial markets.

"The OMT programme has been very helpful for Spain, where market conditions, at least for the moment, are reasonably good and that Spain can live with it."

Over the same time, economists have become more convinced Slovenia will end up asking for a bailout.

The country of 2 million people needs to raise about €3 billion this year to recapitalise its biggest state-owned banks, repay maturing debt and cover its budget deficit.

The poll was conducted mostly after Slovenia held a successful treasury bill sale this week and used the proceeds to buy back some of its maturing debt. But economists are not persuaded it can sort out its problems alone.

"Slovenia is likely to need a bailout, on the one hand for fiscal reasons, on the other hand to stabilise its banking system," said DekaBank's Toedtmann.

"Capital needs for Slovenian banks may be too much for the Slovenian government to carry." Over all, 33 economists said further EU/IMF bailouts would be necessary somewhere in the euro zone and 16 said they would not.

GOING FOR GROWTH

The survey also asked economists what policies would best stimulate economic growth in the euro zone.

Structural reforms targetting the labour market, easing off on the pace of austerity, and getting credit flowing were the top choices of economists.

"The resolution of remaining weaknesses in the banking system and a revival in credit flows is a necessary condition for growth to pick up," said Stephen Lewis, economist at Monument Securities.

"For that growth to be sustainable, structural reforms need to be carried through to improve competitiveness."

A firm majority of economists who work mainly for banks and research institutes - 40 out of 50 - also backed ECB President Mario Draghi's view that it is really down to European governments to restore prosperity to the region.

Draghi on Monday said the ECB was no substitute for reforms that governments and businesses must undertake to beat the 3-year-old debt crisis, which has left countries across the region trapped in recession.

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