A deal that lets the ECB buy Spanish bonds could be announced next week, the Financial Times is reporting

09/20/2012 3:57 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

The Financial Times is reporting in the last few hours that Spanish and European Commission officials have made significant progress on putting together a deal that would allow the European Central Bank to begin buying Spanish government bonds. The key is a rescue program, which needs to be in place before the ECB will move, that focuses on structural reforms to the Spanish economy rather than on new taxes and spending cuts.

The Financial Times story says that this program will be unveiled next Thursday, September 27.

The program to be announced next week would not eliminate the need for Spain to make spending cuts in the future in order to meet its existing budget targets. It would, however, remove the need for new budget cuts and taxes as a precondition to a program of bond buying by the European Central Bank.

As such, the proposal is a compromise that would let Spain secure a bond-market backstop from the European Central Bank without requiring the government of Prime Minister Mariano Rajoy to submit to a Greek-style program of spending reductions and tax increases with monitoring by the International Monetary fund and other international organizations.

The timing would reassure financial markets ahead of a report now scheduled for release on Friday, September 28, on a three-month review of Spain’s banking system. The report will include a new projection—the most definitive to date—of how much money will be needed to recapitalize Spain’s banks. The European Union has already pledged as much as 100 billion euros to that effort.

I think an agreement between Spain and the European Commission that allowed the European Central Bank to assume the role of a backstop to the Spanish bond market would be a big deal to the financial markets. Spanish bond yields have started to creep up in recent days as the EuroZone showed no discernable progress in putting a concrete bond-buying mechanism in place. I’d expect that the euro and European financial markets would both rally on such a deal.

Of course, investors have read news stories before on deals that never materialized so I’m not getting too excited yet. But I’d still mark this down as a positive for a rally that looks to have stalled this week.
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