November 25, 2011 / 5:01 PM / 8 years ago

EXCLUSIVE-Spain's incoming govt may seek outside aid -sources

* New govt studying possible IMF, EFSF, ECB aid -sources

* PP spokeswoman denies aid plan under consideration

* No public appearance by PP leader Rajoy since election win

* Rajoy talking to bankers on economy -source

* Spain Treasury modifies bond issuance plans (Adds bond cancellation, market move, details on PP’s plans)

By Elisabeth O’Leary

MADRID, Nov 25 (Reuters) - Spain’s People’s Party (PP), due to form a new government by mid-December, is considering applying for international aid as one option for shoring up its finances, sources close to the party say.

The PP inherits an economy on the verge of recession, a tough 2012 public deficit target, financing costs driven to near unsustainable levels by nervous debt markets and a battered bank sector with billions of euros of troubled assets on its books.

But Tuesday’s launch by the International Monetary Fund of a credit facility for fiscally responsible countries at risk from the euro zone debt crisis gives it a potential lifeline it may wish to exploit.

“I don’t believe the decision (to seek aid) has been made .. but it is one of the options on the table, because I’ve been asked about it. But we need more time and more information on the current state of things,” one source close to the PP told Reuters.

A senior economic consultant to the PP confirmed to Reuters an application for IMF credit was just one option. In itself it would be insufficient and considered a transitory move, the consultant said.

Help under similar conditions may soon be available from the euro zone’s European Financial Stability Facility rescue fund, which the bloc’s policymakers plan to make more potent.

If extra funding is needed, either from the EFSF or the IMF, it would be politically preferable to make the decision independently and quickly, rather than being compelled by market forces at a later date.

“If we have to do it, we have to do it now,” the first source said.

Asked about seeking outside aid, a PP spokeswoman denied that the party is studying such a plan and said the future government has not been formed yet.

The premium investors demand to hold Spanish over German debt stood at around 458 basis points on Friday afternoon, slightly higher than settlement on Thursday and off euro-era highs hit of over 470 hit earlier this week.

“The market perception on Spain would be enormously improved if there was a sense of resolution on the banks. They’ve probably missed the opportunity to do it on their own strength, but there’s no point in dithering here,” economist at Deutsche Bank Gilles Moec said.

“The absence of resolution on the banks outweighs the cost of calling for international help.”

EURO CORE OR ‘DEATH’

Earlier, Spain’s treasury scrapped plans to sell a new three-year benchmark bond on Dec. 1, replacing it instead with three off-the-run bonds maturing in 2015, 2016, and 2017.

Analysts welcomed the move in light of yields on short-term debt issued by countries on the euro zone’s periphery surging, as well as the fact that Italy too was set to issue a new three-year bond next week. That could allow bonds with different maturities to be more easily absorbed in the market.

The stakes are high for PP leader and incoming prime minister Mariano Rajoy, who will address fellow conservative leaders at a December 7th European People’s Party congress in the French city of Marseilles, the first source close to the PP said.

The source said Rajoy would tell the congress that Spain would need to outdo German Chancellor Angela Merkel in terms of fiscal discipline, France’s President Nicolas Sarkozy on governance former EU President Jacques Delors in terms of growth instruments.

Rajoy would aim to recover Spain’s place as a European leader, he added, arguing that a two-speed euro zone which excluded Spain at its core would signal “death”, he said.

The IMF on Tuesday increased its lending instruments and launched a six-month liquidity line offering help to countries with solid policies that may be at risk from the euro zone debt crisis.

The fund did not say which countries would qualify, though it would act as “insurance against future shocks and as a short-term liquidity window to address the needs of crisis bystanders”.

Rajoy has not made an official appearance since his victory speech after the party trounced the Socialists on Sunday, and gave few details of his economic plans during the campaign.

On Thursday he sent his first tweet thanking supporters for their good wishes, saying he was “working hard”.

This week he has been meeting with the heads of Spain’s biggest banks to make a fuller assessment of the nation’s economic health and decide what his first moves must be, the first source said.

Rajoy has pledged to stick to a deficit target of 4.4 percent of gross domestic product in 2012, which would require huge spending cuts as well as a deeper overhaul of the financial sector hit by a collapse in property prices.

In 2012, Spain’s Treasury must pay back around 120 billion euros in debt redemptions while also financing its deficit. That amounts to at least 200 billion euros.

Spain’s problems could be solved if the European Central Bank adopts a policy of quantitative easing — effectively printing money to buy sovereign bonds. But there is strong opposition to that from Germany and within the ECB.

“Spain would opt for (the ECB solution) first but if that doesn’t happen we will have to get external financing,” the consultant said. (Additional reporting by Judy MacInnes and Fiona Ortiz, writing by Paul Day; editing by Mike Peacock, John Stonestreet)

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