Spain to watch borrowing costs

Spain said Monday it must watch how its borrowing costs evolve before deciding whether to seek a full-blown bailout, and warned the financial crisis threatens welfare benefits. Spain has been widely expected to seek a rescue from the European Central Bank, which has offered to buy government bonds of states that accept strict conditions. But easing borrowing costs since the ECB revealed its plans on September 6 have led to speculation that Madrid may try to avoid a rescue altogether, a strategy some analysts say is risky. "I still don't know the conditions nor whether it is necessary for Spain to request it," Rajoy told parliament when asked about the conservative Popular Party government's plans for a bailout. "We will see how the risk premium develops and the financing differentials ahead," he said, referring to the extra rate charged on Spanish bonds compared to safe-haven German ones, a key measure of financial confidence. These borrowing costs have been the centre of attention over recent months but Economy Minister Luis de Guindos told parliament Wednesday the government's main aim was to boost the economy in Spain, where the unemployment rate is close to 25 percent. "The government's basic aim is not the risk premium nor the banking bailout," De Guindos told parliament, referring to a credit line of up to 100 billion euros offered by the eurozone for Spanish banks. "The government's basic aim in terms of economic policy is to get the Spanish economy to start growing and creating jobs again," he added. "If the situation we have been in for the past five years does not improve in the coming quarters, it will be impossible... for welfare benefits to continue being maintained." During the summer, the annual return on Spanish government 10-year bonds soared well above seven percent, a cost that Madrid admitted it would be unable to bear over the long term. But the rate was 5.598 percent on Wednesday, dragged down further by a decision by Germany's top court to approve a new European rescue mechanism for ratification, with some minor conditions. When compared with safe German debt, the extra rate, or risk premium, charged on Spanish bonds fell below 4.0 percentage points on Wednesday for the first time since April. The Madrid stock exchange closed 0.78 percent higher on Wednesday. The latest drop in rates was prompted by a landmark ruling from Germany's Constitutional Court, which overturned a raft of legal challenges to Germany signing two crucial crisis-fighting tools into law. The court said Germany could finally sign the European Stability Mechanism, which would take a major role in any bailout, and the European Union fiscal pact imposing budget discipline. "It is good news," De Guindos told reporters. The easing of the rates on Spanish debt continued on Wednesday after the German ruling. "This positive tendency comes basically from the ECB's statement of the irreversibility of the euro," De Guindos said. "We all support the irreversibility of the euro project and it is a most important issue. I hope that this will be highlighted" at a meeting of European finance ministers this Friday in Cyprus, he added.