Spain unlikely to go solo; IMF-EU in spat over Greece:Citi

Citi's Jurgen Michels explains to CNBC-TV18 that it is highly unlikely that Spain will be able to fund itself  on relatively low rates and with no improvement in the Greek situation, he adds that the IMF and the European nations are locked in a dispute over contributing to ease the debt scenario in Greece.

Below is an edited transcript of the analysis on CNBC-TV18.

Q: There has been news about Greece and Spain. But I will take up Spain first. The Spanish finance minister has said that perhaps, the country doesn't need a bailout. Do you think that is a viable option or is it largely political rhetoric?

A: I think it is very unlikely that Spain can continue without having external help, both from the EU via the ESM which indeed is pre-condition for support from the ECB's OMT programme. But as observed previously, Spain is not really keen on asking for help and there will be some more market pressure and the regional elections on October 21, to pass before we see an increased willingness from the Spanish government to ask for external support.

Q: So, is this a passing phase and that Spain will ask for help as expected after October 21 and therefore, perhaps the market will not panic?

A: We are hearing negotiations and so far that the Spanish government is not willing to take it. It is all a question about getting under a program which is related and also with external monitoring, it intrudes on a part of its sovereignty and it is in that respect, understandable that Spain is trying to prevent this external influence.

But the performance of the Spanish markets since August 2011 was supported by the ECB - first through the purchases under the SMP program and then through the support of the Spanish banking system and other banking systems as well through the three LTROs, which indeed help to stabilise the Spanish government-bond market and without any external support, it is very unlikely that Spain will be able to fund itself on relatively low rates, going forward.

Q: Are you worried about the situation in Greece?

A: There is a quite an open-end controversial debate going on. A key aspect of the debate questions Greece's ability to come up with the required additional 11.5 billion of savings in 2013-14 after the downward revision of the GDP for 2010-11.

The debt burden of the country has become larger than we thought and the IMF and Europe are locked in a dispute. The IMF wants program–countries to reduce the debt burden before going ahead with the rescue package. Though a PSI was launched in Greece, it has not substantially reduced the debt burden. The IMF also wants the involvement of a formal official sector.

On their part, the Europeans are not willing to make their contribution to reduce the debt and it has become very difficult in countries like Germany and the Netherlands to convince the electorate of forgiving Greece a part of its debt. So the situation remains very fragile and depends on the talks going on at the moment.

A clear picture will emerge after Angela Merkel's visit to Athens tomorrow, the Troika report and the US elections. Currently, there is not much at hand to make a clear assessment of the situation.