Exclusive: Euro zone considering bond insurance for Spain - sources

Thu Oct 4, 2012 9:40am EDT
 
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By Julien Toyer and Paul Taylor

MADRID/PARIS (Reuters) - The euro zone is considering aiding Spain by providing insurance for investors who buy government bonds in a move designed to maintain Spanish access to capital markets and minimize the cost to European taxpayers, European sources said.

One senior European source said the plan could cost about 50 billion euros ($64.5 billion) for a year. It would enable Spain to cover its full funding needs and trigger potentially unlimited European Central bank buying of short-term Spanish bonds in the secondary market.

If the gamble succeeds, it would achieve two important aims. Spain would be rescued without draining Europe's entire bailout fund and there would be no contagion to Italy.

Under the scheme, which officials say is under consideration in Madrid, Paris, Berlin and Rome, the euro zone's new permanent rescue fund (ESM) would guarantee the first 20 to 30 percent of each new bond issued by Spain.

The sources spoke on condition of anonymity because they were not authorized to talk about the discussions.

Finnish Prime Minister Jyrki Katainen aired the idea after meeting French President Francois Hollande on Tuesday: "To safeguard our public money, we could study the possibility of the ESM intervening on the primary market with a leverage effect which guarantees just a part of the debt issued by Spain."

It would be the first time the euro zone had used this first loss insurance scheme, created last year to support vulnerable countries before they lose market access, unlike the full bailouts granted to Greece, Ireland and Portugal.

Another option would be for the ESM to buy Spanish bonds outright at auction, but that might be more expensive and not achieve the same degree of leverage. The rescue fund's rules allow it to buy up to half of any bond emission as part of an assistance program.   Continued...

 
The European Central Bank (ECB) President Mario Draghi speaks during the monthly news conference in Frankfurt September 6, 2012. Draghi announced that the ECB will leave the interest rates unchanged. REUTERS/Alex Domanski