Spain Receives Bank Aid

Spanish Finance Minister Luis de Guindos Jurado, left, talks with Chairman of the Eurogroup and Luxembourg's Prime Minister Jean-Claude Juncker during the Eurogroup ministerial meeting at the European Council building in Brussels, Monday, July 9, 2012.

On Monday Finance Ministers from the 17 member Euro area bloc met for nine hours and agreed to provide Spain with 100 billion euros ($123 billion) in direct loans to support Spain’s crippled banks while handing the country an extra year to meet its deficit targets. 

Thirty billion euros (€30 billion)  will be loaned  by the end of July with the hope of eventually utilizing the euro-area bailout fund to recapitalize banks directly as was previously agreed during the EU Summit last month.

“We are aiming at reaching a formal agreement in the second half of July, allowing the first €30 billion to be mobilised as a contingency for urgent needs of the Spanish financial sector,” Jean-Claude Juncker, Luxembourg’s prime minister and head of the Eurogroup, told reporters following a long meeting in Brussels.
 
Spain also received a year extension to meet its deficit-reduction target.
 
Spain is faced with cutting its deficit to 6.3 per cent  of gross domestic product (GDP) in 2012, and 4.5 per cent of  GDP in 2013, and 2.8 per cent  in 2014.
 
Juncker said the longest maturities of the Spanish bailout, soon to be disbursed by the euro area rescue fund, will be 15 years, with the average maturity being 12.5 years.
 

During the meeting, it was agreed that more consideration would be given towards Spain developing an “asset manager” commonly referred to as “bad bank” which could be used to absorb toxic assets from recapitalized banks.

 
The Eurogroup statement reads, “In principle we are studying the possibility of creating so called ‘companies for the management of real estate assets’ which would receive damaged assets at prices based on reasonable valuations and this would be a way of cleaning up and animating the activities of banks in their fundamental business which is capturing deposits and making loans.”
 
Yesterday Reuters reported, “Spain will create a single ‘bad bank’ to house all its banks’ soured assets and the banks will all increase their core capital buffers to 9 percent in return for up to 100 billion euros in European aid, a government source said on Monday.”

 
Eurogroup  finance ministers said they would begin technical discussions later in September on the mechanism for directly recapitalizing banks after an effective single supervisory mechanism is established. 
 
The timetable for the establishment of a single banking supervisor is a hotly debated topic with no official agreement thus far.
 
The European Commission (EC) claims that the supervisor will be established by the end of 2012.
 
However, German Finance Minister Schaeuble said that it could take some time due to Germany’s constitutional court which is set to give its ruling on complaints against the legality of the European Stability Mechanism (ESM) and the euro area’s fiscal compact.
 
The Eurogroup issued a statement supporting the European Commission’s proposals for an early September installation of the new supervisory mechanism.
 
“We expect the [European] Council to consider these proposals as a matter of urgency by the end of 2012,” the Eurogroup stated.
 
One important topic not discussed at yesterday’s meeting were the future guidelines for the euro bloc’s new rescue fund,  the ESM,  and how it will be utilized for intervention in bond markets.
 
Yesterday the euro made a two-year low of $1.22. while Spain’s 10-year debt yield topped 7 percent.

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