Spain: ECB could have €130bn of eligible bonds to buy

Spain is set to unveil a new rescue plan from the European Union, which could be ready as early as next week, according to reports published today by the Financial Times.

According to the newspaper, EU authorities are working with the Spanish government to come up with a new bailout plan as well as unlimited bond buying by the European Central Bank.

Talks between Spain and the European Union are centred on measures that would be demanded by international lenders as part of a new rescue programme, ensuring they are in place before a bailout is formally requested.

Meanwhile, on September the Spanish government is expected to announce results of a review of its banking system, which will also include how much the European Stability Mechanism needs to recapitalize those banks.

The results will consider both a baseline and a stressed scenario, and as agreed for Spain’s €100bn bailout, the banks will be divided into four groups depending on their strength.

“The market continues to wait and see if Spain will request a bailout sooner rather than later, and if it can come before a Moody’s downgrade. All the preconditions for a Spanish bailout will be in place next week, but the longer they wait, the more market impatience could build,” said Bill Hubard, economist at Markets.com.

According to Hubard, assuming the ECB begins to buy Spanish debt in November, there would be about €130bn of eligible bonds in the 1-3-year bucket they could buy.

“Over time, debt with maturities of 4+ years would roll into the eligible window that the ECB could buy, as well. Of the debt already in the market, this means a further €59bn of OMT-eligible bonds in 2013, and €36bn in 2014. This means between now and year-end 2014, the ECB could buy up to €223bn in Spanish debt,” he said.

To this, it will be necessary to overlay Spain’s funding needs.
“We estimate new deficit funding of around €70bn through end-2013, and rollover of existing debt of €115bn,” he said.

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