December 2, 2010 / 7:26 AM / 9 years ago

UPDATE 3-Spain calls for fiscal integration of euro zone

* Spain bond tender goes well, but yields still jump

* Expects to cut issues of new debt in 2011

* PM says time has come for common euro zone fiscal policy

* Spain sells 2.5 bln euros in 3-yr bonds, yields jump

(Updates with mkt moves, Bank of Spain comments)

By Paul Day

MADRID, Dec 2 (Reuters) - Spain insisted on Thursday it will not need to tap a rescue fund but Prime Minister Jose Luis Rodriguez Zapatero said the time has come for the euro zone to move towards a more integrated fiscal and economic policy.

Spain is quickly moving into the eye of the storm in Europe’s debt crisis and its cost of borrowing at a three-year bond tender on Thursday was around 50 percent higher compared to the beginning of October.

But the jump was not as bad as feared and demand was solid, reflecting expectations the European Central Bank will prop up markets with more bond buying and the belief of some players that Spain is not as much at risk as recent market action suggests.

“Spain isn’t going to have to tap any EU fund or resort to them,” Spanish Prime Minister Jose Luis Rodriguez Zapatero said, according to a transcript of an interview with CNBC. <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

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Spain cannot defy markets without ECB support [ID:nLDE6B01KD] ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

With billions in aid for Greece and Ireland having failed to stem the debt crisis, EU policymakers have begun to think of radical solutions, with ideas so far mentioned on the sidelines of meetings, discussed informally or only sketched out.

The argument for a more unified approach on budgets is that the lack of a full fiscal union among the 16 euro members creates tensions and risk differentials that are now being exploited.

“What Spain advocates is that if we have a single currency, it’s not enough just to have a central bank, a single central bank. It’s not enough to have a single monetary policy. We also need to have a common economic policy,” Zapatero said.

“We need to have a much more integrated fiscal policy, “ he added.

FIGHTBACK

The interest investors charge on Spanish benchmark 10-year bonds ES10YT=TWEB over the German benchmark DE10YT=TWEB narrowed for a second day on Thursday, after hitting a euro era high above 300 basis points on Tuesday.

After a brief rally following the auction, the leading Spanish blue-chip index, the IBEX .IBEX later turned negative after the European Central Bank gave no commitment to step up the pace of its sovereign bond-buying programme.

That pushed the benchmark bond spread out to 243 bps.

The euro zone’s largest bank Santander (SAN.MC), however, was up 1.1 percent and BBVA (BBVA.MC) up 1.2 percent at 1429 GMT. The two banks make up around 30 percent of the IBEX.

The Bank of Spain said Spanish banks were accessing the interbank lending markets as normal. [ID:nMDT009554]

Madrid on Wednesday announced the sale of stakes in leading airports and its state lottery as well as plans to raise tax brackets for smaller companies and cut one-off welfare payments for the long-term unemployed. [ID:nLDE6B015A]

The privatisation proposals were met with almost immediate opposition by unions at state-owned airports operator AENA. The unions said they would meet next week to “establish a calendar of conflicts, demonstrations and strikes in all the airports and control centres”.

Economy Minister Elena Salgado said in an interview with the Financial Times the sale of state assets would allow it to reduce new debt issues next year by around a third to 30-31 billion euros ($40.6 billion).

The government’s biggest problem, however, remains growth and how to reboot its economy after the collapse of a property boom that had driven rising prosperity over the past decade.

The Labour Ministry said the number of registered jobless rose in November and would top 20 percent of the workforce in the fourth quarter overall, after falling for the first time in 3 years in the third. [ID:nLDE6B10F0]

Salgado noted Italy and Belgium as well as Spain and Portugal had been hit by volatile market movements. These have pushed Spanish 10-year bond yields to as high as 5.6 percent from 4.2 percent a month earlier.

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