Spain Mulls EFSF & ECB Bond Market Intervention
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Faced with crippling debt financing costs, Spain is allegedly in talks with the eurozone over conditions for an international bailout aimed at lowering its sovereign yields. However, formal announcements are not expected to surface until mid-September.
Faced with crippling debt financing costs, Spain is allegedly in talks with the eurozone over conditions for an international bailout aimed at lowering its sovereign yields. However, formal announcements are not expected to surface until mid-September.
While no formal request has been submitted yet, sources familiar with the matter told Reuters that “negotiations have started and are well underway” and Spain’s “preferred option” is for the “EFSF to buy bonds on the primary market and for the ECB to buy bonds on the secondary (market)”.
Officials from Spain’s prime minister’s office, economic ministry, as well as the office of the EU Economic and Monetary Affairs Commissioner Olli Rehn all declined comment on the report and denied that negotiations have started.
Earlier this month, Spanish Prime Minister Mariano Rajoy inched closer to asking for an EU bailout for his country, but said he first needed to know what conditions will be attached to the loan, and in what form the rescue would take.
Spain is battling a two and a half year old debt crisis and is facing a troubling exit from capital markets with its 10-year borrowing costs hovering near 7 percent. Last month, the Spain’s borrowing costs peaked at 7.6 percent, a level seen as unsustainable in the medium term.
Spain has already snatched a 100 billion euro ($124 billion) lifeline from its eurozone partners to salvage the nation’s banks, buckling under record bad loans built up since a 2008 property crash.
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However, no formal decision will be made until the ECB’s September 6 policy meeting, though things could change very quickly after that.
According to sources who spoke to Reuters on the condition of anonymity, Spain may be pressured to act before Moody’s publishes its revised country credit score in mid-September – a move that could see Spanish bonds lose their investment grade status.
Separately, ratings agency Standard & Poor’s said on Wednesday that a full-blown bailout for Spain would likely not hurt its sovereign credit rating.
S&P noted “that so far Spain’s government has not decided to request a full bailout, despite growing expectations that it could do so in September, when the conditions likely to be attached to a support program may have become clearer.”
It added:
[quote] However, we think that the potentially advantageous terms Spain could receive under a full bailout could enhance the chances of success of Spain’s already ambitious and politically challenging fiscal and economic reform agenda. [/quote]
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