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Beleaguered Spain denies bailout talks with Germany

THE Spanish government has strongly denied reports that it has discussed a full-scale bailout with Germany.

The reports said Economy Minister Luis de Guindos brought up the issue with German finance minister counterpart Wolfgang Schaeuble in a meeting in Berlin last Tuesday.

They came as Spanish unemployment hit the highest levels in at least a quarter of a century. The jobless rate rose to 24.6pc in the second quarter of the year, up from 24.4pc in the first three months, and the highest level since records began in 1976 -- the year after General Franco died.

In its regular report on Spain, the International Monetary Fund said the economic outlook "remains very difficult and vulnerable to significant downside risks".

Praising Spain for its efforts so far, the IMF said, "the success of this strategy in restoring confidence, jobs, and growth depends critically also on progress at the European level in strengthening the currency union."

The see-sawing hopes on that issue swung both ways yesterday, declining as the German central bank downplayed any change of strategy by the ECB, but rising after a joint statement by German Chancellor Angela Merkel and French President Francois Hollande.

Germany and France are "bound by the deepest duty" to keep the 17-nation currency bloc intact, they said in a joint statement after they spoke by phone yesterday.

The euro rose after the statement and a repeated claim by ECB President Mario Draghi -- echoed by Bank of France governor Christian Noyer in Dublin on Wednesday that dealing with the difference in interest rates across the eurozone comes within the ECB's mandate.

Yesterday's rise in Irish interest rates is the kind of thing the central bank has in mind, where cuts in its official rates are not reflected in stressed economies "hampering the functioning of the monetary policy transmission channel".

French newspaper 'Le Monde' reported that the ECB is preparing a plan to buy bonds in the secondary market in the coming weeks to be followed by purchases directly from governments by EU bailout funds.

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"I would expect the ECB will go in with big purchases, showing the market that it's wrong," said Julian Callow, chief European economist at Barclays in London. "Purchases won't be so large that the central bank is becoming the market," he said

There are still suggestions that an alternative approach to solving the problem could be accepted -- allowing the new European Stability Mechanism (ESM) to become a bank.

A banking licence would give the €500bn ESM virtually unlimited intervention capacity because it could fund itself by borrowing from the ECB.

"I feel that the Germans are changing their position on this," a eurozone official told Reuters "They are scared, and with good reason, and their opposition is softening."

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