Spiralling Borrowing Costs: Euro Zone Weighing New Help for Spain

Spanish borrowing costs have become a major concern for the euro zone. Now, however, help may be on the way. According to a German paper, euro-zone finance ministers may instruct the EFSF bailout fund to begin buying Spanish bonds on the secondary market to push down interest rates.

A Spanish civil servant protesting against austerity measures in Madrid on Wednesday. Zoom
REUTERS

A Spanish civil servant protesting against austerity measures in Madrid on Wednesday.

Spain's troubles are mounting, with indebted regions asking the central government for help and borrowing costs at record highs. There are fears that the euro zone's fourth-largest economy may need a full sovereign bailout even though the country has just received a €100 billion ($121 billion) rescue package to shore up its ailing banks.

The European Union is responding with plans for the temporary bailout fund, the European Financial Stability Facility (EFSF), to buy Spanish bonds on the secondary market in order to push down interest rates on those bonds, German newspaper Süddeutsche Zeitung is reporting on Thursday.

"If Madrid submits a request we are prepared to act," an unnamed EU diplomat told the paper. Spanish Finance Minister Luis de Guindos has urged EU colleagues to authorize the EFSF to buy Spanish bonds. He met German Finance Minister Wolfgang Schäuble on Tuesday and French Finance Minister Pierre Moscovici on Wednesday.

The bank bailout for Spain is a prerequisite for the EFSF to buy bonds because EFSF rules state that this kind of financial aid is only permitted if the affected country has an unresolved banking problem, Süddeutsche said. "We hope we can calm the markets now," it quoted the EU diplomat said as saying.

'The Best Solution'

Berlin has made no official statement on Spain's request but sources close to the German government said it wasn't opposed to bond purchases in principle. Such a move would have to be signed off by a German parliamentary panel consisting of nine lawmakers made up of members of all the five parties represented in parliament. Chancellor Angela Merkel's center-right coalition has five parliamentarians on the panel.

Spain's borrowing costs have continued their recent surge this week, hitting euro-era highs of 7.6 percent on 10-year bonds earlier this week before dropping back slightly. A level of 7 percent is considered unsustainable on the long term. Portugal, Ireland and Greece all sought emergency aid when their borrowing costs hit similar levels.

The French government supports bond purchases. French President Francois Hollande on Wednesday called for rapid and decisive help.

The Spanish government has to make a formal request to the Euro Group, as the group of euro-zone finance ministers is known, which would then have to ask the European Central Bank for an assessment of whether aid is necessary and permissible.

Sources in Brussels told the Süddeutsche that market interventions would be the "best solution for reducing Spanish financing costs."

cro -- with wire reports

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