(Adds no comment from the ESM)
By Belén Carreño
MADRID May 15 (Reuters) - Spain plans to avoid using cheap European Union bailout funds in all but a worst-case scenario in its fight against the coronavirus pandemic, joining Italy in deeming it a politically unpopular option, sources told Reuters.
The EU is offering up to 240 billion euros in special credit from its rescue fund, the European Stability Mechanism (ESM), to help states deal with the economic fallout from the virus, offering zero interest rates and few conditions to its member states. Italy and Spain have been among the hardest hit.
The virus has killed nearly 60,000 people in Italy and Spain and each country is forecast by the EU to suffer economic contractions of more than 9% this year.
Though cheaper than current market interest rates, ESM credit comes with the stigma of resorting to a rescue fund, said four sources familiar with Spanish government plans.
Accessing the fund could even create concerns among private investors in Spanish debt, given the ESM would rank above them as a creditor, they added.
"The very use of the term rescue is a bit problematic," one government source said.
"You're rescued when you can't stand on your own," another said.
Across southern Europe, the ESM is remembered as the bailout fund that imposed heavy austerity measures during the region's debt crisis. Though the new credit lines agreed this month carry no such conditions, the fund remains deeply unpopular.
The ESM declined to comment.
In Italy, too, the government has said it will not resort to the ESM even though for Rome the savings on its new debt requirements would be substantial.
Italy is set to borrow half a trillion euros this year and the Treasury's debt management chief told Reuters that Rome was aiming to gradually double the amount of Italian sovereign bonds held by small retail investors.
When asked about tapping ESM credit, and whether Spain would avoid using it because of the stigma that could be associated with it, Economy Minister Nadia Calvino gave a non-committal response on Friday, telling reporters the government would decide "according to what the general interest is".
"We will finance ourselves in the best available way," she said.
She noted that the ESM offered favourable financing conditions but said Spain was currently financing itself well on markets.
Spain needs about $130 billion in its fight against the coronavirus pandemic and its economic consequences, according to a Reuters calculation based on public comments and information from sources.
HOLDING OUT FOR GRANTS?
Spain's leftist government prefers to lobby hard for another EU funding option, which is still uncertain, rather than use the ESM, the sources said.
That other option is the EU's so-called recovery fund, still under discussion, which could be worth 1 trillion euros and could provide grants and loans to help states revive their economies after the crisis.
European countries remain divided over the way this fund would work and whether it should issue grants.
France has been lobbying alongside Spain and Italy for its establishment, which they want financed by the EU budget rather than by individual member states.
Prime Minister Pedro Sanchez is in contact with his counterparts in other EU countries to push this through, another senior official said, with several of the sources stressing this fund was the priority for Spain.
Even if Italy were to change tack and tap the ESM line, that would not change things for Spain, several of the sources said, adding that Madrid was keen to differentiate itself from Rome.
Besides, the ESM could only give Spain a maximum of 24 billion euros and would be far from covering all its needs, they said.
Spain has however said it would use the so-called SURE line, another European tool approved to face the coronavirus crisis and dedicated to paying unemployment expenses. That could amount to around 10-12 billion of extra cash for Spain, the sources said.
($1 = 0.9258 euros) (Reporting by Belén Carreño; Writing by Ingrid Melander. Editing by Carmel Crimmins)