EU approves up to €100bn package for Spanish banks


EURO ZONE finance ministers gave their final approval for a rescue package worth up to €100 billion for Spain’s ailing banks, a plan in which direct European aid for the banks is put on the long finger.

The move came as the heavily-indebted region of Valencia said it would need emergency aid from the central government to help refinance its debts.

This development, eight weeks after the region of Catalonia sought help from Madrid, underscores the country’s vulnerability at a time when it is trying avert the threat of a full-blown sovereign bailout. “Valencia, like in other autonomous regions, is suffering the consequences of the liquidity shortage in markets due to the economic crisis,” the region’s government said.

The region aims to draw aid from a new €18 billion fund created to provide last-resort support for Spain’s regions and local authorities, which make up about half of all public expenditure in the country.

In spite of the ministers’ approval of the deal, lingering doubt over the viability of the plan and a government warning that recession will continue for longer than foreseen helped push Spanish 10-year borrowing costs to a record 7.29 per cent.

Such interest rates are considered unsustainable, jeopardising Spain’s ability to maintain access to private debt markets for non-bank borrowing as it is required to do under the agreement made yesterday.

The deal did little to inspire confidence on markets, with the euro dropping to yet another two-year low against the dollar and stocks falling in the US and Europe.

Although the government said it will continue to meet fiscal targets agreed with Europe this year and next, its latest economic forecast suggests recession will drag on into next year.

Spain has been at the centre of the debt crisis for months, fuelling fears of a full-scale bailout which could lead to similar pressure on Italy and overwhelm Europe’s “firewall” against the debt emergency.

In a bid to contain the crisis, euro zone leaders agreed at a summit three weeks ago to directly recapitalise Spain’s banks once a pan-European bank supervisor is up and running.

The basic aim in such an initiative, which may set a precedent for the Irish bank rescue, would be to break the link between sovereign and banking debt. To achieve that, the capital involved would not be counted in the Spanish national debt.

In the first phase of the bailout, however, the European rescue funding will go to the banks via the Spanish state and the government will be on the hook for all the money.

The memorandum of understanding between Spain and EU authorities is silent on how or when the banks will be recapitalised directly, saying only that “full implementation” of the pact “will take into account all other relevant considerations contained” in the communique issued after last month’s summit.

The agreement “sets out the precise conditions under which public money will be made available for solvent banks that are unable to raise the capital they need through private means”, said EU economics commissioner Olli Rehn.