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Spain resists full bailout as cost of debt hits new high

Spain continued to fiercely resist looking for a full bailout despite having to pay a euro-era high for short-term debt.

The Spanish government have failed to convince Germany and the rest of the eurozone countries to decouple lending for banks from the state under the terms of the ESM, the new bailout mechanism due to come into force on Jul 9.

But they are pushing to change the nature of the loan from having preferential status over borrowings from the market. Eurozone finance ministers approved up to €100bn for Spanish banks last week, but which Spain has not yet officially asked for.

European Commission sources say legal experts believe the ESM treaty can be interpreted either way, but several member states including Germany will fight to ensure their contribution is as safe as possible.

Spain will be top of the agenda for eurozone finance ministers who meet in Luxembourg tomorrow. They will have the results of the independent analysis of troubled Spanish banks.

Spain’s finance minister will argue that the terms of the bank bailout, linking it to the sovereign and giving it preferential status, is counter-productive and responsible for the soaring cost of debt.

Spain paid an average of 5.074% for €2.4bn of 12-month bonds and 5.11% for €639m of 18-month bills, an increase of about 200 basis points over the last auction for the same maturities on May 14. Yields on 10-year bonds are now over 7%, a level seen as unsustainable.

In contrast the EFSF, which is due to be replaced by the ESM, raised €1.5bn at just 0.14% for six-month bonds, lower than a month ago when it was 0.2% and the demand was double availability.

Some believe that Spain should look for a full bailout with its high unemployment, negative growth and failure to meet its deficit cutting target. But economists argue it would need up to €400bn, more than half the combined EFSF and ESM.

They fear if this did not work immediately it could trigger problems in Italy, considered too big to save.

The ECB will be pushed by Italy tomorrow for a semi-automatic mechanism involving the ECB or the ESM to reduce spreads of eurozone bonds over Germany, Reuters stated.

A senior eurozone official said at present, there was no instrument that would carry out this task.

The same official said there would have to be adjustments to the Greek memorandum of understanding linked to the bailout. “The economic situation has changed, the situation of the tax receipts has changed, the rhythm of the implementation of milestones has changed… If we were not to change the MoU, it wouldn’t work, we would be operating under an illusion.”

Additional reporting Reuters

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