Spanish Banks May Be Offered EFSF Bonds, European Official Says

June 11 (Bloomberg) -- The euro region’s temporary bailout fund may help Spanish banks by giving them bonds that could be used as collateral, a step used to help Greek lenders since April, a European official said.

Should Spain request help from the European Financial Stability Facility, the fund could potentially transfer new bonds to the country’s FROB rescue program, said the official, who spoke on terms of anonymity because an application has yet to be made. The program would then transfer the bonds to Spanish banks in exchange for shares, while FROB would remain liable for the debt. Greek banks have used the debt as collateral that can be deposited at the European Central Bank to raise cash.

The move would allow the Spanish government to channel aid directly to its bank rescue facility without drawing on market issuance to recapitalize the lenders, said the official. Spain has a narrow time window to consider tapping EFSF aid because its permanent successor, the European Stability Mechanism, is due to come into operation in July.

German Chancellor Angela Merkel’s government said today that Spain’s bailout program should draw from the ESM, which offers preferred seniority in insolvency proceedings and is pre-financed through its own cash reserves. Spain’s government said current investors won’t be affected when the country applies for aid, suggesting that it prefers tapping the EFSF, which was set up in May 2010.

Maria Dolores Cospedal, the deputy leader of Spanish Prime Minister Mariano Rajoy’s People’s Party, told reporters today that it was still to be decided which of the two funds would be used and the matter will be discussed at a European summit at the end of June.

If Spain decided to apply for aid from the EFSF it would be required to pay so-called market rates of interest for the help and the bonds would have a different maturity to those bonds offered to the Hellenic Financial Stability Facility in April, said the official. The bonds ranged in maturity from six years to 10 years.

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