It will be channelled through Fund for Orderly Bank Restructuring
The eurozone nations have sealed a deal to provide rescue loans up to 100 billion euro ($122 billion) to Spain’s ailing banks amid speculation that debt-laden Spanish government may also eventually seek a bail-out.
Finance Ministers of the 17-nation euro group finalised the details of financial support for Spanish banks in a video conference on Friday, a day after the German parliament endorsed the rescue plan with a large majority.
They shared the view that “providing a loan to Spain for the purpose of recapitalisation of financial institutions is warranted to safeguard the stability of the euro area as a whole,” Luxembourg’s Prime Minister and president of the euro group Jean-Claude Juncker said after their conference. The Spanish government “will undertake full guarantee for the financial assistance”, he said in a statement.
The ministers made their initial offer to help the Spanish banks on June 9 in an attempt to avert the banking crisis becoming a full-blown debt crisis of euro-zone’s fourth largest economy.
The Spanish government made a formal request for support from the EU on June 25. However, a surge in Spain’s borrowing costs in the past weeks to levels considered unsustainable in the long term fuelled new speculation that a bail-out of the Madrid government will be unavoidable.
Spain’s borrowing costs for 10-year bonds on Friday shot up to 7.2 per cent, a level at which Greece, Ireland and Portugal have had to ask for financial support from the European Union and the International Monetary Fund.
The exact level of assistance to rescue the Spanish banks will be agreed upon by the European Commission, the International Monetary Fund and the Spanish government after an audit of the financial institutions will be completed in September.
However, the ministers agreed that the first tranche of around 30 billion euro could be released by the end of this month or will be kept as a reserve to meet emergency needs, the statement said. It will come from eurozone’s temporary bail-out fund, the European Financial Stability Facility. The aid programme would be transferred to the permanent bail-out fund, the European Stability Mechanism (ESM) when it came into operation, the statement said. The Spanish government will have to restructure its banks, improve their governance and tighten the regulation of the banking sector.
The assistance, which runs until the end of 2013, will be channelled to needy banks through Spanish government’s Fund for Orderly Bank Restructuring, the statement said. The ministers are convinced that the reforms attached to the bail-out of Spanish banks will “help restore efficiency and stability to all areas of the country’s banking sector”.
Spain is the fourth eurozone nation to receive a bail-out from the European Union and the International Monetary Fund.