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The plan could cost about €50 billion for a year. It would enable Spain to cover its full funding needs and trigger European Central bank buying of Spanish bonds in the secondary market. If the gamble succeeds, it would achieve two important aims. Spain would be rescued without draining Europe's entire bailout fund and there would be no contagion to Italy.
Under the scheme, which is under consideration in Madrid, Paris, Berlin and Rome, the eurozone's new permanent rescue fund (ESM) would guarantee the first 20 to 30 per cent of each new bond issued by Spain.
Finnish Prime Minister Jyrki Katainen aired the idea after meeting French President François Hollande: "To safeguard our public money, we could study the possibility of the ESM intervening on the primary market with a leverage effect which guarantees just a part of the debt issued by Spain".
Another option would be for the ESM to buy Spanish bonds outright at auction, but that might be more expensive and not achieve the same degree of leverage. The rescue fund's rules allow it to buy up to half of any bond emission as part of an assistance programme. In either case, Spain would have to sign a memorandum of understanding with its eurozone partners, committing itself to a timetable for implementing austerity measures and economic reforms, and accept international monitoring of its compliance.