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EU bond insurance move for Spain to aid its debt raising

October 5, 2012 Irish Independent
The eurozone is considering aiding Spain by providing insurance for investors who buy government bonds in a move designed to maintain Spanish access to capital markets and minimise the cost to European taxpayers, European sources said.

One senior European source said that the plan could cost about €50bn for a year. It would enable Spain to cover its full funding needs and trigger European Central bank buying of Spanish bonds in the secondary market.

Any move along these lines could make it more difficult for Taoiseach Enda Kenny to reach a deal on our bank debt.

A full bailout like the ones offered to Ireland, Greece and Portugal would cost around €300bn, which would halve the new European Stability Mechanism's fund and leave other countries vulnerable to speculation.

While a plan along these lines would be a cheap way of helping Spain, it would offer little solace to the Government here which hopes that Ireland will be able to benefit from any Spanish bailout.

Finance Minister Michael Noonan last month urged Spain to reach agreement on a bailout.

If the gamble succeeds, it would achieve two important aims. Spain would be rescued without draining Europe's entire bailout fund and there would be no contagion to Italy.


Reports suggested that the deal is under consideration in Madrid, Paris, Berlin and Rome.

The eurozone's new permanent rescue fund (ESM) would guarantee the first 20pc to 30pc of each new bond issued by Spain.

It would be the first time the eurozone had used this first loss insurance scheme, created last year to support vulnerable countries before they lose market access.

Meanwhile, Spain was told by Europe's economic overseers that its 2013 plan to cut the deficit to 4.5pc of gross domestic product relies on excessively optimistic assumptions.

The criticism is a reminder of the powers that Brussels now has over bailout countries' national budgets. Spain's official forecasts are much more optimistic than private sector forecasts.

Spain's 2013 budget assumes the economy will shrink 0.5pc, less than the 1.3pc contraction predicted by analysts. Spanish central bank chief Luis Maria Linde also questioned the government's forecasts calling them "optimistic".

Olli Rehn, the European commissioner in charge of policing budget rules, delivered the preliminary assessment to Spanish Economy Minister Luis de Guindos at a meeting in Madrid earlier this week.

Weaker economic performance would widen Spain's deficit, already forecast to hit 6.3pc this year.