Eurozone approves Spain bank bailout

Posted on July 20, 2012

Eurozone finance ministers have signed off on a loan of up to €100bn to help Spain recapitalise its stricken banking sector.

Their unanimous approval – following a conference call on Friday – came as the risk premium on Spanish bonds returned to troubling levels, with the yield on the country’s 10-year bond rising above 7.1 per cent in early trade.

    Spain announced on Friday that it no longer expected the economy to return to growth in 2013, revising down government forecasts from an expected rise of 0.2 per cent in 2013 to a contraction of 0.5 per cent.

    However, Cristobal Montoro, finance minister, also said that the recession in 2012 would be milder than expected, with gross domestic product forecast to shrink 1.5 per cent instead of the previously forecast 1.7 per cent.

    Under the terms of the Spanish bank aid, a first payment of up to €30bn is expected to arrive in Spanish coffers before the end of the month so that the country can begin the work of repairing a banking sector that has been devastated by a property bubble collapse and recession.

    Olli Rehn, Europe’s economics commissioner, said: “The aim of this programme is very clear: to provide Spain with healthy, effectively regulated and rigorously supervised banks, capable of nurturing sustainable economic growth.”

    In addition to strengthening its banking supervision, Mr Rehn noted that Spain would also be expected to cure the government’s excessive budget deficit by 2014 and push through structural reforms to its economy agreed with Brussels in exchange for the money.

    The full extent of the Spanish programme will not be clear until the government has completed assessments of the country’s banks to determine their capital needs. Troubled banks will be sheared of soured loans, which will be offloaded into a “bad” bank.

    The rescue loans will come from the eurozone’s temporary bailout fund, the European Financial Stability Facility, and will be channelled through the Spanish government, adding to its debt load.

    That could change when a permanent bailout fund is up and running, and empowered to lend money directly to banks for recapitalisations – possibly next year.

    The recapitalisations could hit small Spanish investors who purchased subordinated debt or preferred shares in the country’s banks. As part of the agreement, banks that accept state rescues will impose losses on holders of those securities – a measure that was intended to limit the cost of the recapitalisations to taxpayers.

    In addition to Spain, the 17 eurozone finance ministers also discussed Greece and Cyprus – although no decisions were taken, according to a senior eurozone official.

    Technical teams are being sent to both countries next week to assess their finances. EU officials have given assurances that a solution will be found to help Greece meet a €3.9bn bond payment to the European Central Bank in August while its lenders continue their review.

    Greece’s creditors are deeply concerned about the country’s deteriorating financial condition amid a deeper-than-expected recession and a reform programme that was effectively stalled by successive national elections earlier this year. Cyprus, which is highly exposed to the Greek economy and financial system, has also requested assistance from the EU.

    As the gap between yields on Italian and German bonds reached their highest levels for six months, Mario Monti, Italy’s technocrat prime minister, expressed his “disappointment” that markets had not reacted positively to his economic reforms and fiscal consolidation.

    Mr Monti acknowledged that markets were nervous over the political uncertainty in Italy as it approaches elections early next year. “The future is unknown,” Mr Monti said, urging the main parties supporting his government to keep up the pace of reforms in parliament and commit themselves to a pro-European framework.

    Additional reporting by Guy Dinmore in Rome

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