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Zapatero “absolutely” rules out economic rescue for Spain

Prime Minister Jose Luis Rodriguez Zapatero “absolutely” ruled out Friday an Irish-style rescue for Spain even as markets cranked Spain’s debt risk premium up to record highs.

The prospect of a rescue for Spain’s economy, which is twice the size of that of Ireland, Greece and Portugal combined, is sowing deep concern in world financial markets and in.

Investors are demanding increasingly high rates in return for taking the risk of buying Spanish debt, adding to the problems faced by Madrid in raising fresh cash.

The gap between safe-bet German 10-year bonds and comparable Spanish bonds leapt to a record 2.60 percentage points in morning trade. A few months ago the gap was 1.70 percentage points.

“I am not delivering a message of confidence just because I want to but because of concrete facts,” Zapatero said in an interview with Catalan radio RAC 1.

The prime minister said Spain’s public debt was considerably lower than the European average.

European Union figures show public debt averaged 74.7 percent of Gross Domestic Product for member states in 2009, hitting 78.1 percent in France and 73.4 percent in Germany.

But in Spain the public debt amounted only to 53.2 percent.

Asked if he could rule out a rescue in the wake of Ireland’s banking emergency, the prime minister replied: “Absolutely.”

“Those who make short term bets against Spain will be making a mistake,” Zapatero said, adding that there was “no scenario” under which a rescue of Spain could be envisioned.

“Those who push this idea are not contributing to calm,” he said.

Spain was cleaning out the bad elements which “grew the economy, in part artificially” said Zapatero, referring to a property boom which collapsed and pushed the country into recession at the end of 2008.

“We are carrying out the deficit reduction plan scrupulously and in an exemplary fashion, we have one of the soundest financial systems and the regional savings banks are being restructured at a good pace and will be consolidated at the end of the year,” he said.

Analysts warned any rescue for Spain could have vast consequences.

A former head of the German council of economic experts, Juergen Donges, told the Spanish daily El Economista that Spain’s economy was nine times the size of Ireland’s.

“If according to some calculations Ireland needs 80 billion (euros) then Spain would need 800 billion,” Donges said.

“The European Financial Stability Fund does not have that much money so you would need either to give the plan more resources, which is not the solution, or tell Spain to fix things as best it can, which is not a remedy either,” he added.

Spain’s economy was hard hit by the property bubble and international economic crisis in 2008 and 2009, and it now suffers from an unemployment rate of about 20 percent, along with zero economic growth in the third quarter.

After the Greek financial crisis, the government suspended dozens of road and rail projects and cut civil servants’ wages as part of the deepest spending cuts since Spain returned to democracy following the death of dictator Francisco Franco in 1975.

It aims to bring the public deficit down to 6.0 percent of GDP in 2011 and to the eurozone limit of three percent in 2013. The deficit hit 11.1 percent last year, the third highest in the eurozone after Greece and Ireland.

Zapatero said he had no plan to call early elections, due in early 2012.

“I was elected for a four-year mandate and I am going to complete it responsibly. It fell to me to live through a major economic crisis. I know this country needs reforms and I am going to carry them out.”