September 14, 2012 / 12:30 PM / 6 years ago

UPDATE 2-Spain clears one more hurdle towards aid request

* Spain to present reforms, budget, stress tests on Sept 28

* Sources - Plan to be blueprint for EU aid programme

* Sources - Discussions focus on precautionary credit line

By Julien Toyer

NICOSIA, Sept 14 (Reuters) - Spain on Friday cleared another hurdle towards seeking external aid to finance its debts by announcing it would present by the end of September a new round of economic reforms based on recommendations from the European Union.

Senior European sources said the new measures would likely transform into an economic programme which Spain will have to implement in return for receiving support from the euro zone rescue funds and the European Central Bank to lower its borrowing costs.

The sources, who on Friday participated in a meeting of euro zone Finance ministers in Cyprus, however cautioned Spain had still to decide on the matter. The country’s Economy Minister Luis de Guindos dismissed the idea that the reforms were connected to the demands of an ECB bond buying scheme.

Spain has become the new focus point of the euro zone debt crisis, now in its third year, and analysts as well as sources believe it is only a matter of time before it makes a request for financial assistance.

The new programme of reform will be made public along with the 2013 budget on Sept. 28, the day the Spanish government will also publish the results of a final stress test of the country’s banking sector.

“This is a blueprint for a fiscal and structural program, this is a blueprint for a way forward,” said one of the sources on condition of anonymity.

“Yes, we’re moving towards a bailout but now a decision has to be taken by (Spanish Prime Minister Mariano) Rajoy. And right now, it’s hard to know about his intentions,” the source added.

A second source said the measures to be announced on Sept. 28, if credible, would give a clear indication that Spain is willing to seek aid.

“They need to be credible. They are discussing it with the European Commission, which gave rather positive feedback on it. If the measures are credible, the way is clear,” the source said.

PRECAUTIONARY CREDIT LINE

Both sources said informal talks on this potential rescue package for the country - the second in just a few months after Madrid asked for an up-to-100-billion-euro lifeline for its banks in June - were pointing in the direction of the Spanish government asking for a precautionary credit line.

This enables a country to request a credit line from the euro zone rescue funds, keep issuing debt and only use the money to buy its bonds on the primary market if it really needs to. The conditionality in return for the money is also lighter than for a full-fledged programme.

Spanish Economy Minister Luis de Guindos, however, said at the meeting that the new reforms were “absolutely not” linked to the conditionality of a potential bond-buying programme.

“This will consist in detailing some of the measures announced in July as well as some new ones,” he told Reuters after the meeting, adding they will be in line with recommendations issued by the European Commission in May and a detailed timeline would be provided.

Senior European sources told Reuters last month this set of recommendations, as well as the timeline and monitoring from international lenders, would be necessary to qualify for the programme, meaning Madrid will be in a position to proceed with a potential aid request after the new reforms are presented.

Three other senior European sources said on Friday one of the reasons why Madrid was not moving forward with the request was Germany’s lack of clarity on whether it would answer positively to it.

“The Germans have to make up their mind. It’s not easy,” one of the sources said on condition of anonymity.

Jean-Claude Juncker, who chairs monthly meetings of euro zone finance ministers, said the new reforms would help Spain meet the EU-agreed fiscal targets for this year and next.

Many economists expect Spain to miss its 2012 deficit target of 6.3 percent of Gross Domestic Product despite a fresh package of budget cuts and tax hikes worth 56 billion euros announced in July, leaving the country little choice over an aid request.

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