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ELECTIONS 2011

Election campaign ends with Spain under attack by markets

Economy Minister insists debt sustainability not at risk

The Spanish government on Friday sought to reassure investors it could service its debt as the country remained in the eye of the storm that has been ravaging the euro-zone sovereign debt market.

According to figures compiled by Bloomberg, Spain's risk premium on Friday moved above Italy's for the first time since August but steadied as the European central bank stepped in again to buy Spanish government bonds. The spread between the yield on the benchmark 10-year government bond and the German equivalent closed up 17 basis points at 476 basis points after having hit a new euro-era record high of 503 basis points at one point in the session.

Speaking at a news conference after Friday's Cabinet meeting, the last before Sunday's general election, Economy Minister Elena Salgado said there was "absolutely no concern" about Spain's capacity to meet its debt commitments. At an auction held on Thursday, the Treasury was obliged to offer a yield of over seven percent on 10-year government bonds, the highest rate since 1997.

"In no way does this pose a risk for the sustainability of our debt," Salgado said. "In fact, including the figures from the debt issue, we still have an average cost of debt of under four percent."

Salgado insisted there was some confusion over the benchmark bond chosen to calculate the spread, which some agencies said hit a high of 520 basis points. "The figures that came out do not have sufficient statistical significance," the minister said. "At no point was the 10-year risk premium above that of Italy."

Salgado said only a small part of Spain's outstanding debt had been financed at high interest rates, adding that the country had already covered 89 percent of its funding needs for this year. She also said the average maturity of the country's debt is 6.7 years, the amount of time interest rates would have to remain high to put the country's debt-serving capacity at risk.

Salgado reiterated that Spain would not need financial assistance from the IMF and the European Union. "The idea of asking for a bailout hasn't entered our heads," she said.

The minister argued that the attack on Spain was not justified in terms of the state of the country's economy, pointing out that 12 of the 17 countries in the euro zone had also come under pressure from the markets. "The fact that we have to pay higher prices is not justified by the fundamentals of our economy, rather by tension in the markets," she said.

She insisted Spain would meet its target of reducing its budget deficit to 6 percent of GDP this year from 9.2 percent last year "comfortably," even though the government now expects GDP growth to come in closer to 0.8 percent than its official forecast of 1.3 percent.

Salgado said interest payments on debt will come in between 3.2 and 3.4 billion euros less than forecast in the budget for this year, while spending was also being reined in at the regional level.

The first task facing the administration that emerges from the elections will be to draw up the budget for 2012, she said.

The minister urged the ECB to continue with its bond-purchasing program. "We need an instrument to moderate these tensions and our desire is for the ECB program to remain active," she said. "I trust the good judgment of the ECB, which will do everything possible to guarantee the stability of currency and the stability of our debt markets."