Spain applies for bank bailout

 

Spain has formally requested European aid of up to €100 billion for its banks, the country's economy ministry confirmed in a statement this morning.

Economy minister Luis De Guindos said in a letter to Eurogroup chairman Jean-Claude Juncker the final amount of the financial assistance would be set at a later stage but should be enough to cover all banks' needs plus an additional security buffer.

He also confirmed his intention to sign a memorandum of understanding for the package, which would include full details, by July 9th.

Euro zone finance ministers met last week in Luxembourg to discuss how to channel up to €100 billion in aid to Spanish lenders weighed down by bad debts from a burst property bubble.

Spain's financial plight took centre stage a week before a European Union summit tackles long-term plans for closer fiscal and banking union in a bid to strengthen the euro's foundations, after bailouts for Greece, Ireland and Portugal failed to end the  debt crisis.

Two independent audits by consultants Roland Berger and Oliver Wyman found Spanish banks would need between €51billion and €62 billion in extra capital to weather a serious downturn in the economy and new losses on their books.

The Bank of Spain said the €100 billion offered to Madrid two weeks ago would give a wide margin of error. Spain's three biggest banks would not need extra capital even in a stressed scenario, it said. The government said it did not expect to shut any banks and would restructure those in trouble.

In Luxembourg, the finance ministers decided Spain should initially apply to the euro zone's temporary rescue fund, the European Financial Stability Facility, with the loan taken over by the permanent bailout fund the European Stability Mechanism (ESM) once it is up and running after July 9th.

"The financial assistance will be provided by the EFSF until the ESM becomes available, and then it will be transferred to the ESM," said Mr Juncker, who chairs the Eurogroup of finance ministers.

"We would expect the Spanish authorities to put forward a formal request for financial assistance by next Monday," he said.

Such a solution should avert a problem which had scared investors: debt issued by the ESM must be paid back first in case of a Spanish default, relegating private creditors lower in the pecking order. Because the new bailout debt will originate from the EFSF it will be issued without that requirement.

Reuters

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