Spain will not need external aid, EU powers insist


THE EU authorities insisted Spain has no need for external aid as the country’s central bank said the government’s own actions had contributed to its problems on debt markets.

With Spain’s recession forecast to worsen by the International Monetary Fund, chief of the euro zone finance ministers Jean-Claude Juncker said the country was on track and urged investors to take note of the government’s effort to control its finances.

“I would like to invite financial markets to behave in a rational way,” said Mr Juncker, who is prime minister of Luxembourg.

“Spain will not need an external support programme.”

Amid rising doubt over the viability of its austerity plan and the health of its banks, Spain’s 10-year borrowing costs climbed on Monday to their highest level since December, surpassing the 6 per cent threshold deemed unsustainable in the long run.

Although the European powers still say in public that Spain can overcome its problems without bailout fund aid, the latest bout of pressure on the country has prompted renewed anxiety in Brussels and other capitals.

Argentina’s abrupt seizure of oil assets owned by Spanish group Repsol presents yet more problems for centre-right premier Mariano Rajoy.

Unemployment in Spain is at a record 23 per cent and Mr Rajoy faces a big challenge to rein in spending by its autonomous regions, which account for one-third of public expenditure.

Mr Rajoy has been in power since December but waited until this month to produce his inaugural budget, annoying officials in Brussels. His unilateral move to increase the 4.4 per cent budget deficit target approved by Europe led to further strain.

Finance ministers refused to accept the new goal but settled on a target higher than they originally set: a drop to 5.3 per cent of GDP from 8.5 per cent instead of the 5.8 per cent Mr Rajoy sought.

“Spain’s new deficit target aims for a large consolidation, which is broadly appropriate, although it could have accommodated more fully the impact of the weak growth outlook,” the IMF said in a new forecast yesterday.

The fund said the Spanish economy will contract by 1.8 per cent this year, worse than the 1.6 per cent drop it forecast in January. Europe’s overarching policy priority is to prevent any further escalation of the debt crisis, the IMF added.

In a hearing before a parliamentary committee, Spanish central bank governor Miguel Ángel Fernández Ordóñez said the uncertainties contributed to the country’s troubles.

“The doubts on the deficit goal created enormous worry as well as the presentation of the budget three months afterward, which was probably very justified, but the markets didn’t see it as justified,” the governor said.

He also said tax revenues foreseen in the budget were subject to downside risks.

While Spanish banks are known to have used their portion of the €1 trillion European Central Bank long-term lending scheme to buy government bonds, the benefit has tapered off.

Madrid managed to sell more short-term debt than planned in an auction yesterday but paid a much higher rate of interest than in similar sales last month.

This still eased pressure on the 10-year bond yield, although an auction tomorrow of longer-term debt is seen as a bigger test.

Spain found buyers for €3.18 billion of 12-month and 18-month bonds yesterday, more than the target level of €3 billion.

However, the 2.623 per cent interest rate on the 12-month debt was up from 1.418 per cent last month. In addition, the 3.11 per cent rate on the 18-month bonds was up from 1.711 a month ago.

The country aims to sell €2.5 billion in 10-year and two-year bonds tomorrow.