Exclusive: Spain discussed $366 billion bailout with Germany - source

Spain has for the first time conceded it might need a full EU/IMF bailout worth 300 billion euros ($366 billion) if its borrowing costs remain unsustainably high, a euro zone official said.

Economy Minister Luis de Guindos brought up the issue with German counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday as Spain's borrowing costs soared past 7.6 percent, the source said.

If needed, the money would come on top of the 100 billion euros already agreed to prop up Spain's banking sector, stretching the euro zone's resources to breaking point, and Schaeuble told de Guindos he was unwilling to consider a rescue before the currency bloc's ESM bailout fund comes on line later this year.

"De Guindos was talking about 300 billion euros for a full program, but Germany was not comfortable with the idea of a bailout now," the official told Reuters.

"Nothing will happen until the ESM is online. Once it is operational we will see what the borrowing costs for Spain are and maybe we will return to the question," the official said.

Spain has repeatedly said it would not need to follow Portugal, Ireland and Greece in seeking a full bailout. Asked about the source's comments, a government spokeswoman said on Friday: "We strongly deny any such plan. This possibility (of a 300-billion-euro rescue for Spain) has not been looked at and has not been discussed."

As Schaeuble and de Guindos were meeting on Tuesday, Spanish borrowing costs reached their highest level since the country adopted the euro, hitting 7.64 percent for 10-year bonds - a level at which Spain cannot sustainably borrow from the markets.

But on Thursday European Central Bank President Mario Draghi said the central bank was ready to act to bring down Spanish yields and the 10-year yield fell to 6.88 percent.

A second euro zone official said Spain could manage without a bailout, but had made bad communication mistakes which had unnerved investors. Asked if Madrid needed a bailout the second official said:

"In pure arithmetic terms no, if interest rates were commensurate with what I consider a sustainable situation."

Banking Licence Leverage

Draghi's move to talk down markets is the biggest signal yet that officials are now fully-focused on preventing investor pressure on Spain from forcing the euro zone into a full formal bailout.

The European Stability Mechanism, or ESM, is expected to come into operation in mid-September. It will have a total capacity of 500 billion euros, although it was initially planned that it would only build up this amount over a few years.

That means that coupled with the bank recapitalization loan, a full bailout runs the danger of exhausting the euro zone's rescue capacity, prompting fresh discussions of the idea of granting the ESM a banking license, the official said.

Called for by France but so far opposed by the ECB and Germany as well as Finland and the Netherlands, such a license would give the ESM virtually unlimited intervention capacity because it could fund itself at the ECB's liquidity operations.

Governing Council member Ewald Nowotny offered markets some hope of a softening of the ECB's position earlier this week, saying it had its merits.

Spokesmen for both the Bundesbank and Schaeuble firmly restated their opposition on Friday but the question remains of how the ESM would fund a Spanish bailout in practice, should it prove necessary.

"I believe it is no accident that Nowotny mentioned that - he was sending up a test balloon. And the silence afterwards (from opponents of the idea) was telling," the first euro zone official told Reuters.

"I feel that the Germans are changing their position on this, they are scared, and with good reason, and their opposition is softening," the official said.

The temporary bailout fund, the European Financial Stability Facility (EFSF), has 259.5 billion euros of lending capacity left, of which up to 100 billion is already earmarked for the recapitalization of Spain's stricken banks.

Under current agreements the ESM was to start with only 100 billion euros of lending capacity in July, and its firepower was to rise to 200 billion euros in October as the second tranche of its capital was to be paid in by euro zone governments.

It is unclear what the timetable of payments for capital tranches will be as a result of a delay caused by a German court ruling.

Asked if a banking license for the ESM could be more of a long-term option than a near-term possibility, the official said: "It would be much more a matter of months than years."

[Source: By Jan Strupczewski, Reuters, Brussels, 27Jul12]

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