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Stress tests won't punish debt says Bank of Spain

Source: Reuters - Tue 21st Jun 2011

Spain would only see a modest increase in its public debt load should European bank stress tests show the country's banks needed more capital, the head of the central bank said on Tuesday.

Bank of Spain Governor Miguel Angel Fernandez Ordonez said that if the EU tests show that under extreme scenarios banks need more money then this would be covered either by the banks themselves on markets or through the restructuring fund set up by central bank.

The test results will be published on July 13, sources familiar with the process said.

"Even in the most pessimistic scenarios for the Spanish economy the use of public resources for the recapitalisation of entities would mean only a relatively moderate increase in the Spanish public debt," Ordonez said.

Speaking before a congressional committee, he also urged the Greek government to sign off an austerity package the EU and IMF have demanded in order for it to receive a 12 billion euro aid tranche that it needs to avoid bankruptcy.

"We hope that the Greek government meeting today and in coming days will be able to pass the austerity package called for. Greece faces an immense challenge, but it has to do it to improve productivity and the fundamental outlook for the economy," he said.

Ordonez said it was essential the European authorities concluded a rescue package for Greece as soon as possible as the contagion effects continued to hit other countries in the euro zone periphery. That would be essential, along with reform work in Spain, to reduce the country's debt spread with Germany.

On Tuesday the key risk premium measured by the difference between Spanish ten-year bond yields and equivalent German bunds was around 255 basis points, down around 10 bps from the start of trading and off year-highs close to 300 bps last week .

He said that a restructuring of Greek debt would be a "disaster" and said a voluntary restructuring by private bond holds would be favoured.


Ordonez said the difficult situation particularly affecting the Irish, Portuguese and above all Greek economies could have serious effects for the whole of the euro zone. However, he said the crisis had strengthened ties in Europe.

"Frequently we are seeing the European project binding closer together after overcoming recurrent episodes of the crisis," he said.

"It must be hoped that the European authorities can take the right decisions capable of meeting the challenges this time."

He said that Spain had not escaped contagion effects of the crisis, and the country must meet its fiscal targets, and finish off reform work to ease market tension. Ordonez also urged parliament to make further changes to the recently passed decree on collective bargaining which was criticised by some for not fully untying wages from inflation. He also said inflation would cool in coming months, but it was essential to avoid second round effects from higher wages which would hurt economic competitiveness. Spanish consumer prices rose 3.5 percent year-on-year in May.

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