EU, IMF deny planning credit line to Spain

The European Union and the International Monetary Fund today denied a report that they and the US treasury were drawing up a safety net for Spain, including a credit line of up to 250 billion euros ($335 billion).

Amadeu Altafaj, spokesperson for the European Commission, said the report in Spanish newspaper El Economista was "very bizarre", and added: "I can firmly deny it."

An IMF spokesperson said it was "totally unfounded".

But market worries about Spain's debt position continued to simmer, with the yield spread on Spanish and German 10-year bonds rising to a euro lifetime high of 223 basis points.

"The noise surrounding some form of backstop facility for Spain has increased dramatically," said Silvio Peruzzo, an economist at RBS in London.

A 440 billion euro ($543 billion) special-purpose vehicle (SPV) is already in place for any euro zone country that runs into Greek-style payment problems.

The SPV was finalised earlier this month by ministers from the 16 countries that use the single currency.

The newspaper report, citing sources "close to the issuing entity", said a liquidity plan specifically aimed at Spain had been discussed by IMF board directors and was aimed at staving off a rescue similar to that offered to debt-laden Greece.

A Spanish government spokesperson said yesterday that talks between Spain's prime minister and IMF chief Dominique Strauss-Kahn set for Friday were unconnected with media reports that Madrid might seek a Greek-style bailout.

On the sidelines of a conference appearance in Paris, Strauss-Kahn brushed off questions about the newspaper report.

"I'm in France," the IMF chief said. "Are there rumours about aid to France? I'm going to Italy tomorrow. Are there rumours about aid to Italy? I'll be in Brussels in a week. Are there rumours about aid to Belgium?"

The Economista report was published one day before leaders from the wider, 27-country European Union meet to discuss ways to strengthen cooperation on economic policy.

Backed by guarantees implicit in the SPV, Spain has continued to sell its debt on the financial markets, with the yields investors charge it up around 1 percentage point in the past month but still well below those that drove Greece to seek aid from the EU and IMF.

Spain sold 12-month bills yesterday at an average yield of 2.303%, compared to 1.59% in the same auction in May, while the 18-month bill gave 2.837%, up from 1.951%.

But investor concerns have persisted, focused on government efforts to push through radical labour reforms — on which Spain's cabinet on Wednesday passed a decree — while unemployment stands at more than 20%, and slash a budget deficit running at close to 11% of the GDP.