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Rajoy requests rate action ahead of Merkel visit

Prime Minister Mariano Rajoy has called for action to control the interest rates that Spain faces on the markets. Ahead of a visit from Chancellor Angel Merkel, he said the rates did not reflect economic realities.

Mariano Rajoy said in an interview published in the Thursday edition of the Frankfurter Allgemeine Zeitung newspaper that the borrowing rates Spain was paying neutered any attempts at reforming its struggling economy. He said that the risk premium - the difference in interest rates for Spain compared to Germany - had reached an untenable level.

"The risk premiums are not a result of the fundamentals of the Spanish economy, but rather of doubts about the euro," Rajoy told the paper. "That's why I insist so much on the adoption of a rapid solution."

Rajoy acknowledged that the ECB's main mandate was to keep inflation in check, but said it could play a role in stabilizing the eurozone's 17-country currency union - an apparent call for the bank to buy bonds on the open markets. This idea is likely to be discussed at a key ECB meeting in Frankfurt on Thursday, having met its most notable resistance from board member Jens Weidman, the president of Germany's Bundesbank.

Spain currently pays around an extra 5.5 percent interest on its loans compared to Germany. The ECB could bring this rate down by purchasing bonds itself, and there is the possibility that just the promise to do so would normalize the demands made by private sector lenders.

Jens Weidmann, President of German Bundesbank (Reuters)

Germany's Jens Weidman opposes the ECB buying bonds

"We really are facing extraordinary circumstances," Rajoy said, adding that the current borrowing rates rendered Spain's economic reform efforts useless. "It is now particularly important that all of the uncertainties surrounding the euro are solved and that we can again access sensible borrowing rates."

Caution in Berlin

Rajoy had told several European papers in the run-up to Merkel's Thursday visit that he was hoping the leader of the eurozone's strongest economy would spearhead efforts to reform the currency union. Spain is currently struggling with an unemployment rate of around 25 percent. Its overexposed banks are in the process of receiving emergency loans that could run as high as 100 billion euros ($126 billion).

Germany has been more resistant to ideas that might involve pooling European debt, either in the form of jointly-issued "eurobonds" or with the ECB stepping in to purchase government debt and control interest rates.

Merkel's spokesman Steffen Seibert remained tight-lipped in his address to reporters in Berlin on Wednesday.

"The ECB is independent," Seibert said. "It decides within the sphere of its mandate what it can do to ensure monetary stability - for that is its core assignment - in the eurozone."

The ECB bought some sovereign bonds in the past but subsequently stopped the practice. Seibert described the past purchases as "within the realms of its mandate," but said any future purchases would have to be examined. Merkel's spokesman also said that it was not Germany's job to give the independent central bank advice prior to its own board meeting on the issue.

msh/sej (AFP, dapd, dpa, Reuters)