Eurozone finance ministers gave their final nod of approval for a EUR 100 billion bailout deal for troubled Spanish banks on Friday. The agreement to backstop the Spanish banking sector was unanimous among the 17 members of the eurozone.
After months of dithering as its borrowing costs soared to unsustainable levels, Spain formally requested aid on June 25.
The bailout will provide funding up to EUR 100 billion for the recapitalization of Spanish banks, as agreed last month. In the beginning, EUR 30 billion will be set aside for use in case of 'urgent unexpected financing needs', the Eurogroup said in a statement after a conference call. The first tranche is likely to be made available by the end of this month.
"Ministers concur with the assessment of the Commission, in liaison with the ECB, the EBA and the IMF, that providing a loan to Spain for the purpose of the recapitalization of financial institutions is warranted to safeguard financial stability in the euro area as a whole," the statement read.
The European Financial Stability Facility (EFSF), which is the temporary rescue fund of euro area, will provide the aid, until the permanent European Stability Mechanism (ESM) comes into force. The financial assistance will be transfered to the ESM 'without seniority status'.
The specific loan amount will be determined based on a thorough audit of capital needs for individual banks. The process has already started and is expected to be finalized in September. An independent audit in June showed the banks may needed up to EUR 62 billion in total.
The loans to be used for bank recapitalization will have an average maturity of up to 12.5 years, with any individual disbursement having a maximum maturity of up to 15 years, the Eurogroup said.
The Memorandum of Understanding which will carry the policy conditionality accompanying the bailout deal will be signed in coming days, the group said.
The financial sector-focused conditions includes bank-specific measures such as in depth bank restructuring plans and sector-wide structural reforms that embrace segregation of bank's problematic assets, and the governance, regulation and supervision of the banking sector.
"Restructuring plans will have to comply fully with EU state aid rules, to ensure that the banks that emerge at the end of the process will be viable entities that will not need further public support," European Commission Vice President Olli Rehn said.
The July 9 Eurogroup meeting in Brussels had reached a political understanding on the program designed to help Spain recapitalize and restructure its financial institutions. Finance ministers endorsed the European Commission's proposal to extend the deadline for the correction of the excessive deficit in Spain by one year to 2014.
The Spanish bank bailout won the approval of the German Parliament yesterday. Earlier today, Finnish lawmakers passed the proposal along with a collateral deal the country struck with Spain.
The Finland-Spain collateral deal agreed earlier this week, allows the former to receive collateral in exchange for loans to the latter. It is agreed that the collateral will be 40 percent of Finland's EUR 1.9 billion contribution to the rescue deal.
Meanwhile, markets remain unconvinced and the Spanish benchmark 10-year bond yield remained above 7 percent today. The yield crossed the danger threshold yesterday following an auction of the country's bonds.
The auction revealed surging borrowing costs and poor demand for the Spanish debt, suggesting that the respite provided by the government's latest round of austerity measures was short-lived.
Prime Minister Mariano Rajoy unveiled a EUR 65 billion austerity package on July 11 that requires further tax hikes and spending cuts. The capital Madrid has witnessed massive anti-austerity protests since yesterday. The country's jobless rate at 24 percent is the highest in the euro area.
Elsewhere on Friday, the Spanish government cut its economic forecast and sees the recession extending into next year. The government now expects the economy to shrink 0.5 percent in 2013, in contrast to its earlier forecast for growth of 0.2 percent.
The International Monetary Fund has slashed Spain's economic outlook for next year and now sees a 0.6 percent contraction versus the 0.1 percent growth expected in April. The economy is forecast to contract 1.5 percent this year compared to the 1.9 percent contraction expected earlier.
by RTT Staff Writer
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