IMF chief in Spain as market confidence returns

18th June 2010, Comments 0 comments

The head of the IMF was set for high-level talks in Spain on Friday at the end of a tumultuous week marked by rumours of a bailout and then renewed market confidence over Spain's debt.

A plan to convince sceptical markets that Spanish banks are sound, also backed by EU leaders, and a successful auction of long-term government bonds eased investor fears that the country was heading for a Greek-style financial crisis.

"Spanish policymakers seem to perform better under pressure than Spain's football team so far," said Marco Annunziata, the chief economist of UniCredit Group, referring to the nation's shock defeat to Switzerland in the World Cup.

Thursday's "debt auction went well, Finance Minister (Elena) Salgado confirmed that bank stress tests will be published ... and the government has pushed through by decree a set of labour market reform measures," he said.

The Socialist government also received support on Thursday from the International Monetary Fund, which said it was "very impressed" by Madrid's efforts to tame its debt and deficit problems.

The comments came on the eve of talks in Madrid on Friday between IMF head Dominique Strauss-Kahn and Spanish Prime Minister Jose Luis Rodriguez Zapatero.

The visit had fuelled speculation earlier in the week that Spain might be seeking a massive bailout from the IMF and the European Union.

Spanish business daily El Economista said Wednesday the IMF, the EU and the US Treasury had drawn up a rescue plan for Spain including a credit line of between 200 and 250 billion euros (246-307 billion dollars).

The plan would use money from a special-purpose fund worth up to 500 billion euros put in place last month to help eurozone nations that run into Greek-style debt problems, it added.

The EU, the IMF and the Spanish government strongly denied the reports.

At an EU summit in Brussels on Thursday, Zapatero slammed what he called "all these unfounded rumours" and French President Nicolas Sarkozy offered his support when he said there was "no problem" with Spain's finances.

The rumours of a bailout along with possible strains within the Spanish banking system hurt the market this week.

To calm market nerves about the strength of its financial institutions, Salgado said the Bank of Spain will publish "stress tests" on the ability of its banks to withstand any sudden financial shocks.

Germany also decided to go public with analyses of their banks. And in Brussels, EU leaders agreed to release the results of similar tests.

"By announcing its intention to publish the results, Spain has raised the stakes and the market expectations, now it will need to show that it is up to the challenge," Annunziata said in a note.

"Moreover, greater confidence in Spain's financial system could in turn bolster market optimism on the country's ability to repair its public finances."

But Bank of Spain Deputy Governor Javier Ariztegui introduced a note of caution when he warned of a potential liquidity crunch for the country's banks, the newspaper El Mundo said Friday.

"In the environment that we're in, Spanish institutions have held up well, but if markets don't function in the coming months, there will eventually be liquidity problems, there's no doubt," Ariztegui told a closed-door session of parliament Tuesday, according to a transcript obtained by the paper.

After Spain's public deficit ballooned to 11.2 percent of Gross Domestic Product last year, the Socialist government launched an austerity drive to slash the shortfall between revenues and spending to the eurozone limit of three percent in 2013.

The government on Wednesday also passed crucial reforms of the rigid job market, deemed essential for reviving the economy -- but only after talks with the unions and employers broke down.

As a result, the country's two main unions called a general strike for September 29 to protest the plan, which they charged "will harm the rights of workers" and "delay the economic recovery."

In what markets took as a positive sign that the government is getting to grips with the crisis, the treasury on Thursday got through a critical loan test as a sale of debt bonds attracted strong demand.

The Spanish treasury issued 3.0 billion euros in 10-year bonds and 479 million euros of 30-year bonds, to raise a total of 3.479 billion euros (4.305 billion dollars), at the top end of its expectations of 2.5 billion to 3.5 billion.

Investors submitted bids worth 6.83 billion euros for the bonds, although the treasury had to offer higher interest rates to draw buyers than at the last similar auctions on May 20 and March 18.

"Spain has passed its test," said Cyril Regnat, a bond strategist at French investment bank Natixis.

© 2010 AFP

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