MADRID // Spain is appealing to Arab sovereign wealth funds to buy public debt it will issue to pay for a bank aid package, the industry minister Miguel Sebastian said in an interview. Without investment from Gulf states and other countries, the package may fail to boost bank liquidity or lending and Spain's severe economic problems could drag on, Mr Sebastian said following talks last week with the Gulf Cooperation Council (GCC).
"You can only increase liquidity in the system if we attract liquidity from abroad," he added. "We are offering these sovereign funds the chance to buy Spanish bonds." Spain's Socialist government plans to purchase up to 50 billion (Dh247 billion) in mortgage-backed-bonds and other bank assets to raise financial system liquidity and jump-start lending. The Treasury will auction debt to pay for acquisitions of long-term, investment grade debt that banks cannot sell during current market turmoil.
Should domestic banks buy the paper, the plan will recycle funds around the Spanish financial system rather than create new liquidity for credit operations, Mr Sebastian said. "In that situation there is no net increase in liquidity, we have to go abroad to sell our new issues." Mr Sebastian, the former chief economic adviser to prime minister Jose Luis Rodriguez Zapatero, said it was all but inevitable Spain would enter recession, despite economy ministry forecasts the economy will grow 1.6 per cent this year and 1 per cent the next, after 3.7 per cent in 2007.
"If by recession you mean two quarters of negative growth it's evident we are going to be really close," Mr Sebastian said. "What's important is the speed at which we fix financial problems." The comments follow a meeting in Madrid with the GCC Secretary General Abdul-Rahman al-Attiyah to discuss purchases of Spanish sovereign and corporate debt. The GCC's six member countries, including Saudi Arabia, operate state run sovereign wealth funds that are investment agencies using money from oil profits.
The funds worry some Western governments, which say they lack transparency and base investment decisions on politics. Mr Sebastian said they were essential to meet Spain's heavy foreign financing needs during turmoil in global money markets. "We are sending the message we are open to investment, not only from these countries, but many others," he said. Spain has launched an international debt sale campaign, with the slogan "In Spain we Trust", after forecasting 2009 gross financing needs will increase 51 per cent to 104.5bn to cover a swelling public sector deficit.
Spain sees public borrowing as a means to speed recovery and says it can afford soaring issue costs, given a relatively low debt to gross domestic product ratio of 37 per cent. * With Reuters