DEBT DRAMA

Pressure eases on Spanish debt but EU bond-buying deal denied

Risk premium sees sharpest daily drop so far this year G20 report warns Spain could miss deficit targets

The markets seem to think that the beginning of the end of the crisis could be near, and they celebrated this by easing the pressure against Spain’s sovereign debt. The risk premium, the excess yield that investors demand to buy Spanish debt over the benchmark German bund, ended Wednesday at 512 basis points after reaching a low of 510, the sharpest drop since December 5.

On the other hand, the European Commission denied any “negotiations” at the recently ended G20 summit regarding the possibility of using rescue funds to buy government bonds from countries under pressure. This option is strongly opposed by Germany. According to Berlin, this kind of financial support cannot be a substitute for the efforts of budgetary consolidation or economic reform that will restore confidence in those economies under greatest pressure from the markets.

German Chancellor Angela Merkel told journalists that “the purchase of bonds is not part of the negotiations.” The European Commission’s spokesman for economic affairs, Amadeu Altafaj, also denied a reported deal between European leaders to allow the European Fund for Financial Stability and the future Stability Mechanism to buy 750 billion euros’ worth of Spanish and Italian debt in order to relieve market pressure.

The controversial debt-buying measure was described as “intelligent” by Spain’s Foreign Minister José Manuel García-Margallo. Asked whether Spain will formally request financial aid for its banks on Thursday at a meeting of the Eurogroup, the official said that the government will wait for an upcoming report by independent auditors on the state of the banking sector.

The purchase of bonds is not part of the negotiations,” said Merkel

Meanwhile, the G20 summit in Mexico closed with an upbeat message about the prospects for Europe but few specific measures.

“What I’ve heard from European leaders is they understand the stakes, they understand why it’s important for them to take bold and decisive action, and I’m confident they can meet those tests,” said US President Barack Obama at a Tuesday news conference. Obama has been pushing Germany to ease up on its austerity recipe for Europe.

In a self-evaluation, the group of 19 countries plus Europe analyzed whether the targets set in the previous seven summits have been met. Spain got a failing grade in budget adjustment despite a “very notable structural effort” and the implementation of deficit cuts.

The report, based on IMF estimates, warns that Spain could fall short of the 2013 target as a result of the weakness of the economy and the restructuring of the banking system. The G20 report coincides with Brussels’ warnings that the bailout of Spanish banks through the Spanish state will result in a bigger deficit, not just greater public debt.

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