Euro zone set to speed up bailout of Spanish banks

10th July 2012

The Guardian's Graeme Wearden writes that Euro-zone finance ministers vetoed two main decisions last night:

1) To dispense €30bn to in immediate loans to help Spain's troubled banks, as part of a package that could reach €100bn. Ministers also agreed to use the euro-area bailout fund to recapitalize banks directly.

2) To ease Spain's budget targets, giving the country an extra year to get its budget deficit in line with the bloc's rules. Under the plan (recently proposed by the European Commission), Madrid would run a deficit of 6.3% of economic output in 2012 (up from 5.8%), and 4.5% for 2013. It would then drop to 2.8% in 2014.

Eurogroup President Jean-Claude Juncker said: "We are aiming at reaching a formal agreement in the second half of July, taking into account national parliamentary procedures, allowing for a first disbursement of 30bn euros by the end of the month to be mobilised as a contingency in case of urgent needs in the Spanish banking secto."

"There will be specific conditions for specific banks, and the supervision of the financial sector overall will be strengthened," he added.

As annual yields on 10-year Spanish government bonds continue to creep above the 7% mark, a level deemed unsustainable. Laurence Norman and David Román of The Wall Street Journal say the concession on the deficit is designed to avoid provoking a further downward plunge of the already sickly Spanish economy.

"It also came as European officials wrangled over last month's agreement of euro-zone leaders to allow the bloc's bailout fund to directly boost the capital of struggling banks in the region. In dispute is whether governments of beneficiary banks would have to make good on any losses suffered by the fund on its investment in the banks."

Gabriele Steinhauser and Matina Stevis of the same paper just wrote up a good story about this very issue, here. It explains:

"Germany's finance minister said that even once the euro zone's bailout fund has been authorized to directly recapitalize struggling banks, the lenders' host government should retain final liability for any losses.

"Wolfgang Schäuble's statement early Tuesday indicated disagreements on how far the currency union needs to go to protect countries from expensive bank failures. His declaration, which followed more than nine hours of talks between euro-zone finance ministers here, clashed with those of other officials, who insisted that banks' host states wouldn't have to guarantee any support from the bailout fund.

"The issue is hugely important for Spain, which risks being locked out of financial markets amid concerns over how a European bailout for its banks will affect Madrid's ability to repay investors."

"As if external financial support for the euro zone's fourth-largest economy wasn't fraught with enough uncertainty, euro-zone policymakers are making matters worse by failing to provide reassurance that a bailout of Spain's weakest banks won't end up being at the expense of the sovereign," said Nicholas Spiro, managing director of U.K.-based consultancy Spiro Sovereign Strategy.

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