UPDATE 2-Spain says won’t be next to fall in euro crisis

* Portuguese contagion ruled out – Econ min

* Spain cut growth forecasts Weds

* Spanish bond auction to be closely watched

(Adds background, comments, market movement)

By Elisabeth O’Leary

MADRID, April 7 (Reuters) – Spain will not follow ailing
neighbour Portugal in seeking a European bailout, Spain’s
Economy Minister said on Thursday, hoping Lisbon’s move will
draw a line under Europe’s debt crisis.

Caretaker Prime Minister Jose Socrates announced late on
Wednesday that Portugal was asking for financing from the
European Union, the third euro zone member to do so after Greece
and Ireland last year. He argued the economic risks had now
become too great to go it alone after borrowing rates soared.
[ID:nLDE7352DS]

The much-anticipated bailout could turn market attention
back to Spain and its weakened public finances, ahead of a
Treasury auction of three-year bonds at 10:40 a.m. (0840 GMT) on
Thursday.

“The market continues to give Madrid the benefit of any
doubt at the moment, but the auction performance will be
scrutinized for any hints of waning investor interest on this
front,” Lloyds analysts wrote in a daily note.

The risk premium on Spanish 10-year bonds compared with the
German benchmark narrowed slightly on Thursday morning, to 179
basis points. [ID:nLDE7331G9]

Whether they fall further is likely to depend on investors
keeping faith with Madrid’s drive to cut its deficit
aggressively and revive an almost-stagnant economy struggling
with high unemployment.

A three-year bond similar to the one to be auctioned on
Thursday was trading at a yield of 3.34 percent ahead of the
auction (ES3YT=RR: Quote, Profile, Research), lower than earlier this week, indicating
Spain’s borrowing costs could fall at the auction.

SALGADO RULES OUT CONTAGION

“(The risk of contagion) is absolutely ruled out … it has
been some time since the markets have known that our economy is
much more competitive,” Economy Minister Elena Salgado told
national radio station SER.

Spain had about 25 billion euros ($34 billion) in foreign
direct investment in Portugal in 2009, the last year of
available figures, and Spanish banks have $98.3 billion in total
exposure to the country next door, holding around a third of its
foreign-owned debt.

Analysts say Spain is shielded as long as a rescue package
comes through for Lisbon, but some 8.5 percent of Spain’s
exports are sent to its western neighbor, meaning that the
budget austerity that will accompany a bailout are likely to
have a knock-on effect. [ID:nLDE71K14K]

“Portugal’s bailout request puts the likes of Spain under
the spotlight, but we are of the opinion that Spain will not
follow due to its improving fiscal situation and recovering
economy, while also passing key structural reforms in the labour
market and pensions,” Credit Agricole analysts said in a note to
clients.

ECB IMPACT

Spain dragged itself out of an 18-month recession at the
start of last year but growth has stuttered since then and the
central bank and many economists doubt the economy can grow as
much as the government expects.

Official forecasts for growth in 2012 and 2013 were cut to
2.3 percent and 2.4 percent respectively, pointing to the likely
impact of higher interest rates and oil prices.
[ID:nLDE73527C]

But Salgado argued that a widely-expected quarter point
interest rate rise by the European Central Bank on Thursday
would not endanger an economy already dealing with harsh public
spending cutbacks and labour market reforms.

“The impact of a small rise in rates is very slow. Mortgages
(in Spain) are only revised once a year and so the transmission
(of a rate rise) is not immediate,” she said.

Spanish banks are seen as among the most vulnerable in
Europe to a series of ECB rate hikes. Although one round of
higher rates will not cause problems, further hikes will squeeze
profit at banks and push already-stretched borrowers into
arrears, analysts said [ID:nLDE7340WD]

(Reporting by Elisabeth O’Leary; Writing by Fiona Ortiz;
editing by Patrick Graham)

UPDATE 2-Spain says won’t be next to fall in euro crisis