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Oct 4, 2012

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 European Central bank buying of 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.

In either case, Spain would have to sign a memorandum of understanding with its euro zone partners, committing itself to a timetable for implementing austerity measures and economic reforms, and accept international monitoring of its compliance.

In EU jargon, the bailout would take the form of an Enhanced Conditions Credit Line with investor protection (ECCL+).
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