Euro-area finance ministers gave final approval to as much as 100 billion euros ($122 billion) of bank aid for Spain, putting Greece back on the front line of the bloc’s crisis-fighting agenda.
The decision paves the way for the European Financial Stability Facility to raise 30 billion euros “which can be used in case of urgent unexpected financing needs,” according to a statement from the group of 17 ministers. Banks will be able to receive payments via the Spanish government’s bank-rescue fund after submitting approved restructuring plans.
“Providing a loan to Spain for the purpose of the recapitalization of financial institutions is warranted to safeguard financial stability in the euro area as a whole,” the ministers said in the statement after a conference call today.
The ministers didn’t decide on other aspects of their quest to tame the debt crisis now in its third year, such as how they’ll make sure Greece can make a 3.1 billion-euro bond payment in August or tackle rising borrowing costs in Italy. Luxembourg’s Jean-Claude Juncker, who heads the group of euro finance chiefs, said earlier this month that the single-currency bloc would find a technical solution to help Greece in August, before the next scheduled meeting of ministers in September.
“The goal of today’s conference call was above all Spain,” Luxembourg Finance Minister Luc Frieden told reporters. “The troika in Greece still has to check several more things, and until that work is completed, no further steps can be taken.”
The euro extended a three-week loss, dropping to a two-year low against the dollar. Spain’s 10-year bonds fell for a seventh day, driving the yield to as high as 7.27 percent. The extra yield investors demand to hold the securities instead of German bunds rose to as much as 610 basis points, the most on record.
Spain agreed to shore up its banking sector and rein in public spending as a condition of the aid package, which will be spelled out in a final memorandum of understanding “that will be signed in coming days,” according to today’s statement. Spain’s Fund for Orderly Bank Restructuring will receive loans with an average maturity of up to 12.5 years, with a 15-year maximum maturity for individual disbursements.
“Spain will be expected to maintain its commitments to correct its excessive deficit in a sustainable manner by 2014 and to adopt the structural reforms set out,” European Union Economic and Monetary Affairs Commissioner Olli Rehn said in a separate statement. He said the bank aid is for solvent banks unable to find private financing, so they can restructure and not require future public assistance.
An asset management company, or bad bank, will be created to buy “problematic assets of aided banks,” the memorandum said. The bad bank, set to be operational by November, will buy mainly real-estate development loans and foreclosed assets, as well as “other assets if and when there are signs of strong deterioration.”
It will pay “real long-term economic value” for the assets, according to the document, posted on the Spanish Economy Ministry website. A Spanish official, who asked not to be named, said at a briefing in Madrid that the mechanism avoids selling assets at firesale prices and 10 years would be a reasonable period to hold the assets. Lenders that use the bad bank may end up holding stakes in it, along with the FROB bailout fund, another official told the same briefing.
Investors holding tier 1, upper tier 2 and lower tier 2 bonds, which account for lenders’ capital buffers, potentially could face losses of their principal under the burden sharing exercises to be conducted by banks receiving public aid, another economy official said at the same briefing. Senior bondholders won’t face losses, EU and Spanish officials said.
“The involvement of the private sector in burden sharing would be restricted to shareholders and junior bondhonders,” Simon O’Connor, a spokesman for Rehn’s office, said in an interview on Bloomberg Television. “That’s made very clear in the memorandum.”
Still, the document does open the door to liquidation of banks, even as the Spanish officials said there were no plans to do so.
Spain will have to present “an orderly resolution plan” for banks that aren’t viable, which will protect deposits, minimize the burden to the taxpayer and involve the transfer of assets to the bad bank, the document said.
The bank rescue is a key plank in Spain’s efforts to maintain access to financial markets and rein in debt-crisis contagion. Prime Minister Mariano Rajoy began mapping out Spain’s economic path through the next 18 months today in the face of mounting pressure from protesters and investors, who have pushed bond yields above 7 percent.
“Whether the bailout program for Spain will help to calm the markets and reduce the funding costs of the sovereign is unclear,” Antonio Garcia Pascual, Barclays Capital chief economist for Southern Europe, said in a note to clients. “International investors remain on the sidelines, as well as some of the domestic financial institutions. Key in our view will be the program execution.”
Spain’s bailout will start through the EFSF, which has 240 billion euros in remaining capacity. The permanent 500 billion-euro European Stability Mechanism is on hold until a German court ruling due in September. It won’t be allowed to work directly with Spanish banks until the euro area establishes a common bank supervisor with an expanded role for the European Central Bank.
The ESM will take over the rescue program once it is up and running. When the transfer takes place, the loans won’t gain any kind of seniority status, the euro ministers said in their statement.