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Spain to seek bailout if yields too high for too long

Published: September 26, 2012 | 9:14 am
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Spain’s Prime Minister Mariano Rajoy on Wednesday said he was ready to seek a new rescue package for his troubled country but only if its debt financing costs remain too high for too long.

Investors have been jittery that Spain’s apparent reluctance to seek a bailout – a condition for European Central Bank action to cut the country’s borrowing costs – could propel the euro zone into even deeper trouble.

Rajoy had said previously that a reduction in Spanish bond yields after the announcement of a bold bond-buying plan by the ECB could allow Spain to put off seeking further support.

“I can assure you 100 percent that I would ask for this bailout,” he told the Wall Street Journal.

He, however, added that it was too soon to say if Spain would need a European Central Bank and euro zone rescue funds bond-buying program and that he still needed to check that strings attached to it are “reasonable”.

Rajoy spoke as protesters clashed with police in Spain’s capital after thousands formed a human chain around the parliament and demonstrated against a new round of austerity measures for the 2013 budget to be announced on Thursday.

Madrid, the latest epicenter of the euro zone debt crisis, needs to cut its budget gap by more than 60 billion euros ($78 billion) in the next two years, a difficult task in a contracting economy.

The government sought a 100-billion-euro credit line from its euro zone peers in June and is now racing to recapitalize the country’s lenders, badly hit by the bursting of a decade-long real estate bubble.

The results of an independent stress test of the financial system are due to be released this week, along with next year’s budget and new structural reforms.

Among the new measures will be the creation of an independent fiscal authority, which would help the country rein in central government and regional finances and regain investors’ confidence.

Setting up this fiscal institution is one of the recommendations the European Commission included in a document from last May that is now used as a basis for aid talks.

Another of this recommendation is to keep the pension system sustainable. Reuters reported last week that the government was considering freezing the annual inflation review of pensions and speeding up a planned increase in the retirement age.

Rajoy said he would present new steps to limit early retirement and said he had made no decision on whether raising pensions payments according to price rises, a move which could cost the state up to 6 billion euros as consumer taxes hikes and high energy prices could push inflation to 3 percent.

“We need to be sufficiently flexible in order not to create any further problems,” he said. ($1 = 0.7715 euros)


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