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Europe

Spain's new government may ask for international aid

Text by News Wires

Latest update : 2011-11-25

Spain's new government said Friday they are considering international aid, either in the form of a credit line from the IMF or funding from the European Financial Stability Facility, in a bid to get the country's faltering economy back on track.

REUTERS - Spain’s new centre-right government, due to be officially sworn in mid-December, is considering applying for international aid as one of its options to shore up its finances, sources close to the party say.

The People’s Party (PP) inherits an economy on the verge of recession, a tough 2012 public deficit target, rising financing costs on nervous debt markets and a battered bank sector with billions of euros of troubled assets on its books.

"I don’t believe the decision (to seek aid) has been made .. but it is one of the options on the table, because I’ve been asked about it. But we need more time and more information on the current state of things," one source told Reuters.

If extra funding is needed, either from the European Financial Stability Facility (EFSF) or a credit line from the International Monetary Fund, it would be politically preferable to make the decision independently and quickly, rather than being compelled by market forces at a later date.

"If we have to do it, we have to do it now," the source said.

When asked about seeking outside aid, a PP official declined to comment.

The IMF on Tuesday increased its lending instruments and launched a six-month liquidity line, offering help to countries with solid policies that may be at risk from the euro zone debt crisis.

The Fund did not say which countries would qualify for the credit line, though it would act as 'insurance against future shocks and as a short-term liquidity window to address the needs of crisis bystanders'.

A senior economic consultant to the PP told Reuters an application for IMF credit was just one option on the table. In itself it would be insufficient and considered a transitory move, the consultant said.

One of the possible functions of the euro zone’s EFSF rescue fund, which the bloc’s policymakers are grappling with making more potent, will be to offer precautionary credit lines to prevent a member state from running into financing difficulties.

Incoming Prime Minister Mariano Rajoy has not made an official appearance since his victory speech after the party trounced the Socialists on Sunday, and gave few details of his economic plans during the campaign.

This week he has been meeting with the heads of Spain’s biggest banks to make a fuller assessment of the nation’s economic health and decide what his first moves must be, the source said.

Rajoy has pledged to stick to a deficit target of 4.4 percent of gross domestic product in 2012 which would require huge spending cuts, as well as a deeper overhaul of the financial sector hit by the collapse of the property sector.

In 2012, Spain’s Treasury must pay back around 120 billion euros in debt redemptions while also financing its deficit. That amounts to at least 200 billion euros.

Spain’s problems could be solved if the European Central Bank adopts a policy of quantitative easing—effectively printing money to buy sovereign bonds. But there is strong opposition to that from Germany and within the ECB.

"Spain would opt for (the ECB solution) first but if that doesn’t happen we will have to get external financing," the consultant said.

Date created : 2011-11-25

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