Spain could get ESM precautionary credit line: Rehn

Spain could be given a precautionary credit line from the euro zone's permanent bailout fund, if it decided to seek financial aid, which it could use to buy its own bonds at primary auctions, the EU's top economic official said in an interview.

The comments on Friday by Olli Rehn, the European Union's Economic and Monetary Affairs Commissioner, are the first from a senior European policymaker to describe publicly what kind of program Spain could get.

Spain is the latest epicenter of the euro zone debt crisis, which started nearly three years ago, and investors believe the country won't be able to deflate a big budget gap, control soaring debts and reform its economy without outside help.

Madrid has been considering for weeks the possibility of requesting a bond-buying program from the euro zone rescue funds and the European Central Bank to help them get cheaper financing and reform the economy.

"We have in the new toolbox of the ESM, a precautionary credit line, which is called Enhanced Conditions Credit Line," Rehn said in the interview.

"It facilitates the kind of primary debt market interventions of Spanish government securities that we would have in mind in case there would be a request."

Rehn said the credit line would run in parallel with the European Central Bank's unlimited bond-buying program, called Outright Monetary Transactions.

The Enhanced Conditions Credit Line is one of the instruments in the permanent bailout fund, the 500 billion euro European Stability Mechanism (ESM), which can be offered to euro zone countries that are under financing pressure.

The credit line can then be used to buy bonds at primary auctions or to insure debt bought by private investors, thus helping the country to finance itself in the markets.

"There is no request from Spain. I know the Spanish government is open to consider this. The European Commission is ready to act as soon as a request comes from Spain," Rehn said.

Spanish Economy Minister Luis de Guindos said on Friday the European bond-buying plan was fully ready for use but he declined to say when a request from Spain might come.

FISCAL CONSOLIDATION

Rehn is preparing to publish updated growth and deficit forecast for the EU's member states on Nov 7.

He said sustainable growth was necessary to end the crisis but sticking to fiscal consolidation and structural reforms was equally important.

The International Monetary Fund is pushing for a softer deficit-cutting path for troubled euro zone countries, such as Spain or Greece, but Rehn said Madrid's economic policies were on track and he noted the country had already been given an extra year, to 2014, to reduce its deficit to 3 percent of economic output.

He noted that Belgium had won back investors' confidence by standing by its fiscal consolidation targets and ending more than a year of political bickering to form a government that could pass a tough budget.

Commenting on Greece, which is negotiating with international lenders the terms on which the euro zone and the International Monetary Fund would resume emergency lending to Athens, Rehn said he expected a deal on the reforms next week.

"I expect we could reach a staff-level agreement next week, and we are working to specify the financing needs and debt sustainability. All this will be part of one package that the Eurogroup (euro zone finance ministers) will decide at some point," he said.

The staff-level agreement specifies prior actions or policy conditions that Greece must meet to get more money from the euro zone after it fell behind the agreed schedule because of two general elections in May and June.

The reforms and the 2013 Greek budget, once passed by the Greek parliament, together with the debt sustainability analysis and the resulting financing needs, will form a revised memorandum of understanding between the euro zone and Greece, which will enable disbursements of aid to resume.

"All this (could happen) in the coming weeks so that the Eurogroup can take the decision on the next disbursement in the course of the first half of November," Rehn said.

(Editing by Julien Toyer and Neil Fullick)