Reports of 250bn credit line for Spain

Reports have surfaced that the EU, the IMF and the US treasury are drawing up an emergency liquidity plan for Spain that includes a credit line of up to 250 billion.

Spanish daily El Economista reported on Wednesday (16 June) that the plan was discussed at a special IMF board directors meeting and was aimed at avoiding some of the harsher components of Greece's recent bail-out.

"The solution outlined for Spain will benefit from the resources of the bail-out fund of the union and a contribution from the IMF, consisting of a credit line that the fund provides to countries with solvent economies but at risk of contagion," said the paper.

A steady stream of recent German media reports citing unnamed Berlin officials have fueled speculation that Spain is about to tap the eurozone's 750 billion rescue mechanism, agreed by EU leaders last month.

European Commission chief Jose Manuel Barroso was among those on Monday to bly deny this is the case.

The El Economista news comes the same day that Madrid is due to publish its labour-market reform plans, despite failing to secure support from the country's trade unions and with no guarantee that parliament will approve the measures when it votes later this month.

The government project will limit the length of fixed-term contracts to two years and allow companies to reduce worker hours in a downturn instead of dismissing staff, among other measures.

On Wednesday, EU economy commissioner Olli Rehn indicated that he wants the country's Socialist government to outline its 2011 deficit cutting measures in much greater detail.

Brussels and financial markets have continued to pile pressure on Prime Minister Jose Luis Rodriguez Zapatero to sharply reduce the country's budget deficit from its current level of 11.2 percent of GDP.

Doubts about Spain's banking system also continued to grow this week after government officials and senior banking executives admitted Spain's financial institutions are facing a major credit squeeze.

As a result, the country's banks are borrowing record amounts from the European Central Bank as they struggle to secure funding from international capital markets.

Madrid has indicated it would support ongoing stress tests of the European banking sector being made public, despite the move being bly opposed by Berlin.

Spanish officials are confident the country's main firms will show up well in the tests, but economists say it is the smaller regional lenders that are in the real trouble after lending billions in euros to failed property development schemes.

[Source: By Andrew Willis, Euobserver, Brussels, 16Jun10]

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