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DEBT CRISIS

Spain wants risk premium guarantee before asking for bailout

ECB must endeavor to keep credit benchmark at around 200 basis points, Madrid argues

The government wants guarantees that if it goes ahead with the request for a second European bailout, as it is being pressured to do, the European Central Bank (ECB) will intervene in the secondary debt market to ensure that the risk premium on Spanish sovereign debt goes down to around 200 points and stays there. This is the condition that Spain is setting before it officially requests the loan, government sources say, denying rumors that the real reason for the delay are regional elections taking place in various part of Spain on October 21 and November 25.

Madrid also denied allegations that German Chancellor Angela Merkel is trying to postpone the Spanish bailout until she can put the matter to her own parliament together with the Cyprus bailout and an extension to the Greek bailout.

The conservative Popular Party (PP) administration of Mariano Rajoy said that a risk premium of 200 points –which measures the difference between investor faith in the Spanish 10-year bond and the benchmark German one -- is “reasonable” given the economic situation of both countries. This would make Spain’s debt situation sustainable, let the government finance itself at reasonable rates and allow the Treasury to repay maturing debt in the midterm.

By comparison, last Friday the Spanish risk premium closed at 417 points, having reached a historical high of 638 points in July, well beyond the point where other European countries such as Ireland or Portugal requested a bailout.

But ECB President Mario Draghi has made it clear that he will not launch a program to buy unlimited amounts of Spanish or Italian debt in the secondary market if those countries’ governments do not first request an EU bailout, which will come with “strict conditions.”

Government sources said that a Spanish bailout must meet four requirements: Spain must request it, its conditions must be accepted, goals must be set, and all EU members must approve it.

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