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Spain no nearer bailout after Italy vote

Source: Reuters - Wed 27th Feb 2013
Spain no nearer bailout after Italy vote

Spain is no closer to seeking bond-buying help from the ECB than it was before Italy's election, which has triggered renewed market turmoil, Economy Minister Luis de Guindos said on Tuesday.

De Guindos said in an interview that he would push ahead with planned tax cuts for 2014 and beyond while maintaining deficit-cutting efforts in a drive to create growth and pull Spain out of recession.

"Spain is not closer or further from an OMT program than it was 24 hours ago," he said.

"We should not pay too much attention to the short-term reaction of the markets because markets usually overshoot in the short-term. What I hope and expect is that Italy will finally and eventually get a stable government which will continue with the reform agenda."

The ECB has taken much of the sting out of the euro zone debt crisis by pledging to buy as many government bonds as necessary to shore up the currency bloc via a program called Outright Monetary Transactions (OMT).

The verbal promise alone has been enough to drive down borrowing costs, at least until Italy's election.

The premium investors demand to hold Spanish 10-year debt rather than the German benchmark jumped to 393 basis point on Tuesday, a level not seen in several weeks. Spain's blue-chip index Ibex was down 2.7% by close of business yesterday.

Earlier yesterday, Spanish Foreign Minister Jose Manuel Garcia-Margallo sounded more alarmed, saying there was a feeling of "extreme concern" over possible movements in bond spreads in reaction to potential Italian political gridlock.

But de Guindos said neither market jitters nor the bleaker economic outlook released last week by the European Commission would deviate the government from its economic policy.


Spain, which implemented strong austerity remedies to cut its public deficit from 9.4% of GDP in 2011 to close to 7% in 2012, has now started to implement more growth-oriented policies.

De Guindos said the government hoped the European Commission would grant the country a more "sensible" deficit-cutting path over the next three years. Madrid has already been given an extra year to meet strict deficit targets and is now hoping for another.

While ruling out new budget cuts for 2013, he said the priority for 2014 was to combine fiscal consolidation with stimulus policies, including tax cuts PM Mariano Rajoy committed to when he took office in December 2011.

"These are commitments that we have. We'll have to combine this commitment with the continuation of the fiscal consolidation effort. We think it will be positive and will be possible over the next months," de Guindos said.

He said the new approach would be reflected in the economic program Spain will send to the European Commission by April 1, which that will cover 2013, 2014 and 2015.

Spain, which has taken advantage of improved market conditions to sell close to 25% of the debt it plans to issue this year, has set four priorities to keep international investors on its side.

It wants to complete the euro zone's planned banking union, keep control of its finances including those of the 17 autonomous regions, to finish the clean-up of its banks and to deliver structural reforms it has committed to.

This, he said, would go a long way in closing the gap between the north and south of the euro zone.

"There are not 1st-class or 2ndclass passengers. We are all in the same boat ... despite the fact that we had seen an increasingly higher fragmentation in capital markets," he said. The ECB bond-buying program was a backstop for Spain's struggling economy, but was no substitute for those reforms.

The government, over the next 2-3 months, will table a reform of the pension system, put forward new laws to make the economy more competitive and boost access to credit and sell nationalized lenders, de Guindos said.

The sale of lender Bankia and smaller former savings bank NCG Banco are still a remote prospect but Catalunya Banc is more advanced, with the window for non-binding bids closing at the end of the week.

De Guindos said there would be no tax break or asset protection scheme for the failed Catalan lender, which is drawing interest from Spain's two biggest banks Santander and BBVA among others.

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