UPDATE 3-Spain tries to calm markets, warns Germany

* Markets should focus on Spain’s fundamentals: economy min

* Too early to involve private investors in bailout talk

* Spain’s autonomous regions will respect deficit needs

(Adds links to graphics)

By Paul Day and Manuel Ruiz

MADRID, Nov 24 (BestGrowthStock) – Spain urged Germany on Wednesday
not to push its idea of involving private sector investors in
any future euro zone rescue plan as Spanish borrowing costs hit
new highs on fears Madrid could eventually need a bailout.

In an interview with Reuters, Economy Minister Elena Salgado
gave the first open indication of dissent since European Union
leaders agreed at an Oct. 28 summit to introduce a permanent
system for handling financial crises from mid-2013.

Salgado said it was too early to talk of the implementation
of any plan that would force private investors to share the pain
of future bailouts — a concept championed by Berlin.

“We don’t think this idea is quite appropriate right now,
including after 2013,” she said. [ID:nLDE6AN1EX]

German Chancellor Angela Merkel said on Wednesday European
politicians needed the courage to make private investors share
in the risk of future debt crises in the euro zone and show
financial markets who is in charge. [ID:nLDE6AN161]

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For graphic on the euro zone’s struggle with debt:

graphic http://r.reuters.com/hyb65p

Comparison of euro zone peripheral economies

http://r.reuters.com/zem66q

CDS curves — Greece, Ireland, Portugal and Spain

http://r.reuters.com/xyq76q

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

A German document obtained by Reuters shows Berlin now wants
euro zone sovereign bonds to include private sector liability
clauses from 2011 to ensure a smooth transition to a new rescue
mechanism from 2013. [ID:nBAT005789]

It is unclear whether Germany’s latest idea will be accepted
by other EU leaders, who will discuss it in mid-December.

The cost of insuring Spanish bonds against default rose to
record highs on Wednesday as Ireland’s debt crisis spilled over
into other euro zone debt markets. Five-year credit default
swaps, a form of insurance, reached 312 basis points on Spanish
government debt on Wednesday, up 10 basis points on the day.

Spain’s risk premium, the extra interest it must pay
investors over benchmark German yields, also rose to its highest
level since the euro currency was born, at more than 250 basis
points. (ES10YT=TWEB: ) (DE10YT=TWEB: )

DRIVING HOME THE MESSAGE

Spanish officials took to the airwaves on Tuesday and
Wednesday to insist that Spain is different from Ireland and is
solvent.

Although a Spanish bailout is seen as unlikely — only four
out of 50 economists polled by Reuters this week see it
eventually becoming necessary — the country’s sluggish economy
and debt-laden banks have heightened perceptions of risk
[ID:nLDE6AN0KK].

Salgado called on financial markets to focus on Spain’s
economic fundamentals such as its austerity measures and
financial reforms, and resist what she called speculative
attacks on the euro.

Although Spain has made strides in reducing its deficit and
restructuring its weaker banks, investors are concerned about
high levels of debt at the local government level and banks’
exposure to bad loans to builders who got caught when Spain’s
property boom went bust. [ID:nLDE6AN1CD]

Spain’s autonomous regions are cutting their debt piles in
line with expectations, Salgado said.

Analysts have said that if Spain’s 17 self-governed regions,
with combined debt of more than 100 billion euros, let their
budgets run out of control it will put the country’s deficit
reduction targets in doubt and weaken credibility with
international investors.

“They’re doing their homework,” Salgado said of the
autonomous communities in an interview with Punto Radio.

She said Spain’s reforms and austerity measures were having
the desired effect on the country’s goal to reduce its budget
deficit within EU limits and reiterated that a pension reform
bill will be presented by Mar. 31.

“(But) financial crises are very harsh and this one wakes up
with a different face every day,” Salgado said.
(Reporting by Tracy Rucinski; Editing by Catherine Evans/Ruth
Pitchford)

UPDATE 3-Spain tries to calm markets, warns Germany