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Spain says no urgent need to tap EU rescue funds

Spain's government said it is not in an urgent need of a financial rescue from its European partners and that it will wait until the European Central Bank has worked out its bond-buying scheme before making a decision.

twitter-logo IANS   Brussels     Last Updated: October 19, 2012  | 00:00 IST

Spain's government said it is not in an urgent need of a financial rescue from its European partners and that it will wait until the European Central Bank (ECB) has clearly worked out its bond-buying scheme before making a decision.

Spanish officials delivered the message on Thursday in Brussels, where Prime Minister Mariano Rajoy is taking part in a meeting of the European Council, the EU's executive arm.

The country's delegation at the summit , which began Thursday, said a hypothetical sovereign bailout request is not on the agenda and that instead Spain wants to make progress toward implementing agreements reached in June with other Eurozone members, including plans for a European banking union.

In pressing its point, Rajoy's administration pointed to strong demand and lower interest rates for Spanish bonds in an auction on Thursday.

The Spanish Treasury sold more than 4.6 billion euros ($6 billion) worth of bonds at lower interest rates than in previous auctions. In the case of the 10-year note, the interest rate on that debt was the lowest since January.

Spain's government said before requesting an aid package from the European Union, it wants to know all the details on the ECB's plan to buy the debt of cash-strapped Eurozone countries.

That bond-buying program is contingent on those nations first seeking help from the EU's rescue funds.

Rajoy's administration played down the fact that some other European leaders commented about a possible bailout request by Spain.

French President Fran├žois Hollande said he hoped during a meeting with German Chancellor Angela Merkel and Italian Prime Minister Mario Monti to clarify the details of the aid mechanism designed to lower Spain's borrowing costs.

Also on Thursday, Merkel told German lawmakers that an eventual decision by Spain to ask for a rescue package or not was "exclusively" up to Rajoy's government.

Spanish officials, meanwhile, said the potential aid request would not depend on an agreement being reached at the Brussels summit to fast-track the establishment of a single banking supervisor.

Spain's risk premium - the extra return investors demand to hold the country's benchmark 10-year bond compared with equivalent German debt - dropped below 400 basis points this week for the first time since early April.

The lower bond yields were due in part to a decision on Tuesday by Moody's Investors Service to leave Spain's credit rating at investment-grade level, although the ratings agency assigned the country a negative outlook due to persistent risks.

Moody's, which had slashed Spain's rating by three notches in June, justified its decision by noting the country "will likely apply for a precautionary credit line from the (recently established) European Stability Mechanism", which will cover all new bailout applications from Eurozone member states.

"This should in turn help sustain demand for Spanish government bonds by allowing the ECB to activate its Outright Monetary Transactions (OMT) program of secondary market purchases," Moody's said.

The ratings agency also deemed positive the steps Spain has taken to restructure its banking sector and shore up institutions that were battered by the collapse of a long-building real estate bubble, saying they should "help to restore market confidence in Spain's banking system as a whole".

Moody's explained that it has a negative outlook for Spain because, among other risks, the country's "credit standing would be negatively affected by a lack of progress in placing the country's public finances on a sustainable footing."

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