Spain not mulling seeking further EU help: sources

MADRID Thu Jul 26, 2012 6:06am EDT

Civil servants hold ''No to cuts'' placards as they take part in a protest against government austerity measures outside Madrid's town hall July 25, 2012. REUTERS/Susana Vera

Civil servants hold ''No to cuts'' placards as they take part in a protest against government austerity measures outside Madrid's town hall July 25, 2012.

Credit: Reuters/Susana Vera

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MADRID (Reuters) - Spain is not considering seeking immediate help from the European Union to ease its spiraling borrowing costs, two Spanish sources said on Thursday, although the euro zone is eyeing possible action for later this year.

With the troika of international lenders due to report back to European authorities on the parlous situation in Greece in September and a challenging autumn in terms of funding for Madrid, top euro zone policymakers are discussing ways to shield the currency union from further contagion.

Spanish borrowing costs this week hit record highs since the launch of the euro 13 years ago, while Italy's are back at levels not seen in several months.

Spain's 10-year bonds were trading at around 7.4 percent on Thursday, down from around 7.7 percent in previous days, although this level is still seen as unsustainable.

Sources in Madrid denied German and Italian newspaper reports on Thursday that it was on the point of asking the euro zone's EFSF rescue fund for help via buying bonds.

"Neither a total rescue of the Spanish economy nor a bond-buying program from the EFSF is being looked at," said one of the Spanish sources.

Another source said the government was focused on getting the decisions from the last European union summit implemented as well as on recapitalizing its banks for which it sought an up to 100-billion-euro European credit line in June.

"We have to respect the times, the rhythms. Spain sought aid for the banks on June 9 and we only signed the final agreement this week ... The government is not looking at that (further rescue)," said the second source.

"Some instruments are not even up and running. It would not make sense to make statements about mechanisms which doesn't exist," the source added.

Although dramatic decisions do not look imminent, there is clearly a lot of thinking being done across the euro zone. Italian and Spanish yields slid on Wednesday after European Central Bank policymaker Ewald Nowotny said he could see grounds for giving the future euro zone bailout fund a banking license so that it could draw on ECB funds.

MORE HELP?

A senior European Union official told Reuters Spain may need help with its primary market bond sales to take the pressure off its yields. But its partners, notably Germany, were doubtful.

"While it's true that taking such action was provided for in the agreement at the last summit, there is a deep reluctance to go ahead with it, not least from Germany," the official said.

"The concern is that stepping in to buy bonds is going to further destabilize market dynamics at a sensitive time. It could have the contrary effect to what's intended and no one wants to make things worse for Spain or Italy."

Policymakers fear intervention could lead to either a buyers' strike or a profound dislocation with the secondary market that simply scares off international investors.

Italian newspaper Il Sole 24 Ore said on Thursday a request by Spain to tap the euro zone's rescue funds was imminent.

Spain would agree to a number of commitments not much different from those undertaken as part of the memorandum of understanding it signed for the bank bailout, the paper said, adding the EFSF could start buying bonds almost immediately.

The permanent European Stability Mechanism (ESM) would take over once it comes into force later in the year.

German newspaper Suddeutsche Zeitung quoted another European diplomat as saying the EFSF could also be used to buy Spanish bonds from private banks to boost demand and reduce the state's burden. It said Germany was not opposed to the idea.

As pressure mounts on the euro zone authorities to step in to support Spain and Italy, Belgium said the ECB should be able to support struggling member states directly, if such a request was made.

Such a move would only be possible if member states asking the ECB for assistance would commit to a program to bring down their deficits, Belgium's Foreign Minister Didier Reynders, who served as the country's finance minister between 1999 and 2011, told a group of European journalists.

He also said Spain should seek more EU assistance.

"We only received one request from Spain: money for the banks. I am not sure it will be enough. I see that there are now problems in the regions. The government has to say it needs more. Not necessarily money. Maybe it would be useful to ask for more time to comply with the commitments. Or seek more money. Maybe it would be useful to organize something with the ECB," he was quoted as saying in Spanish newspaper El Pais.

(Editing by Mike Peacock)

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