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Spain Bailout Request Hinges on ESM Status, Cannata Says

Spain will not make a request for European Union bond buying until it gets clarity on whether the region’s permanent rescue fund will be considered a preferred creditor, said Italy’s debt agency head Maria Cannata.

“There is some fear over this in the market,” Cannata said in a speech in Rome today. “I fear that until this issue is clarified, any expectations for Spain to make a request won’t be satisfied.”

The issue of the creditor status for the ESM, which has been authorized to buy sovereign debt in conjunction with the European Central Bank, must be cleared up or it will create a “segmented market,” she said.

There will be “uncertainty on the part of investors over how they will be treated in case the issuer runs into difficulty,” Cannata said.

Italy doesn’t need to tap the European rescue fund as the country’s banking and economic systems are solid, Cannata said.

This year was a “record” year for government bond redemptions, Cannata said. Next year’s issuance strategy will likely resemble that of 2012, she said, adding that the redemption profile is “much smoother next year” while 2015 will be more challenging.

Italy’s borrowing target for 2013 will fall to around 410 billion euros from 470 billion euros this year, as the country will face less redemptions and Italy’s net funding needs will drop by 20 billion euros, she said.

Foreign investors have been returning to Italy “at an increasing pace” since August, Cannata said. Investors’ fears “are not linked anymore to the control of public finances or the debt level, they are more related to growth and political uncertainty, In Italy as well as in Europe,” Cannata said. Foreign investors now hold 35 percent of Italian debt, she said.

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