WRAPUP 2-Spain vows won’t be next after Portugal seeks aid

* Portuguese contagion ruled out – Spanish econ min

* Greek 2010 deficit bigger than forecast

* OECD says Spain won’t have same problems, Trichet praises

* Spain Treasury sells 3-year debt, yields steady

(adds Portuguese politics, OECD, Trichet comments)

By Elisabeth O’Leary

MADRID, April 7 (Reuters) – Spain vowed on Thursday it would
not follow ailing neighbour Portugal in seeking a European
bailout, and a successful Spanish bond auction suggested markets
do not immediately fear contagion.

The fall of another euro zone domino following Greece and
Ireland focused attention on Madrid, testing the efforts that
its government, and European authorities, have poured into
erecting a firewall to buttress its public finances.

“(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,” Spanish Economy Minister Elena Salgado
told national radio station SER.

News that Greece has fallen behind on its deficit reduction
target, and rising expectations that Athens will have to
restructure its debt, showed that the single currency area has
yet to fully resolve the sovereign debt and banking crisis.

Caretaker Prime Minister Jose Socrates announced on
Wednesday that Portugal was asking for financial assistance from
the European Union, saying the economic risks had become too
great to go it alone after borrowing rates soared.

While European Union officials voiced relief, non-euro zone
Sweden criticised Lisbon for waiting too long.

“They should have requested aid much earlier,” Swedish
Finance Minister Anders Borg told journalists. “They have placed
themselves and Europe in a very difficult situation.”
[ID:nWEA3246]

Portugal said it would submit a formal request on Thursday.
A senior euro zone source said Lisbon would have to make clear
if its caretaker government has the authority to negotiate a
bailout before a June 5 general election.

EU officials said a deal would probably be agreed before a
new government is elected, signalling Brussels was keen to avoid
it being enmeshed in electioneering if possible. But the
campaign may nevertheless complicate talks on austerity measures
required to secure EU/IMF rescue loans.

The main centre-right opposition Social Democrats said they
supported the minority Socialist government’s application, but
both big parties are seeking to score points by blaming each
other for the humiliating resort to aid. [ID:nLDE7361H1]

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

Analysis on Portugal and euro debt crisis [ID:nLDE736086]

Graphics on euro zone’s debt struggle

http://r.reuters.com/hyb65p

BREAKINGVIEWS on Spain [ID:nLDE7360KI]

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

SMOOTH AUCTION

The head of the Organisation for Economic Cooperation and
Development, an intergovernmental policy think-tank, said Spain
would not face the same problems as Portugal because it was
addressing key challenges. [ID:nBUS002304]

“Spain has addressed the four things that had to be
addressed: the deficit, the labour markets, the pensions and the
financial system,” the OECD’s Angel Gurria said in Budapest.

European Central Bank President Jean-Claude Trichet
confirmed that the ECB, which has been buying Portuguese bonds
and propping up its banks with liquidity, had pressed Lisbon to
seek assistance. [ID:nLDE7360TD]

Speaking after the ECB raised interest rates for the first
time since before the global financial crisis in July 2008,
Trichet said Spain had already done a lot, but needed to
continue. The executive European Commission also said Spain was
on track to fulfil its deficit reduction targets.

By contrast, a source close to Greece’s international
lenders told Reuters that Athens’ 2010 budget deficit would be
revised to above 10 percent of gross domestic product, requiring
corrective measures to stem spillover effects. [ID:nATH006004]

EU paymaster Germany’s leading economic institutes said they
expect Greece’s sovereign debt will be restructured — a view
shared by a majority of Greeks, according to an opinion poll
released on Thursday. [ID:nBAT006149] [ID:nLDE7360E1]

That could cast Greece into a deeper economic depression and
cause problems for convalescent European banks, notably in
Germany and France, the two main foreign holders of Greek public
debt. Diplomats say this is one reason why euro zone governments
and the ECB are anxious to delay any such move until after 2013.

The long-anticipated Portuguese call for help turned the
spotlight back on Spain and its weakened finances, but the
Treasury easily sold 4.1 billion euros of 3-year bonds on
Thursday without yields spiking up. [ID:nLDE7351S0]

“The auction confirms that investors separate Portugal from
Spain,” said Estefania Ponte, economist at Cortal Consor in
Madrid.

The risk premium on Spanish 10-year bonds compared with the
German benchmark rose fractionally to 181 basis points on
Thursday but remained close to a two-month low.

Spanish 10-year yields are around 5.2 percent compared with
the 6.1 percent Portugal was paying shortly after Ireland was
rescued last November. Benchmark German 10-year yields have
risen by around 50 basis points since then.

Whether Spanish rates 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. [ID:nLDE7331G9]

The next expected step is a reform of collective bargaining,
loosening the link between inflation and wages, expected in
mid-April after the government gave unions and employers longer
to reach an agreement.

SPAIN SHIELDED?

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

Analysts say Madrid is shielded as long as a rescue package
comes through for Lisbon, but some 8.5 percent of Spain’s
exports go to Portugal, so the budget austerity that accompanies
a bailout is 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.

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 due 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 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]
(Additional reporting by Nigel Davies and Manuel Maria Ruiz in
Madrid; Ingrid Melander and Harry Papachristou in Athens,
Charlie Dunmore in Brussels, Niklas Pollard in Stockholm;
Writing by Paul Taylor and Fiona Ortiz; editing by Patrick
Graham)

WRAPUP 2-Spain vows won’t be next after Portugal seeks aid