Spain to draw down 30 bn euro loan in July
By Sarah Collins | Tuesday 10 July 2012
Spain will receive a first, €30 billion tranche of its EU rescue loan this month to set up a contingency fund for its ailing banks. Eurozone finance ministers, meeting on 9 July, agreed that the money, part of an overall deal worth €100 billion, should be paid out on the condition that Spain agrees to sell off or wind down certain banks and strengthens supervision, particularly in the country’s regional savings banks, or cajas. The EU has also insisted Spain stick to a programme of spending cuts and economic reforms, though the requirements are not directly linked to aid payments.
“It is essential that the multiple challenges Spain is facing - the repair of its banking sector, structural reforms to boost growth and jobs and tackle imbalances, and action to restore sustainability to its public finances - are addressed with equally strong determination,” Economic Affairs Commissioner Olli Rehn said after a marathon nine hours of talks with eurozone finance ministers, on 10 June.
Spain is facing rising borrowing costs as markets fret over the terms of the bailout and whether it will add to the country’s overall debt load, which is expected to top 80% of GDP this year. However, Luxembourg’s Luc Frieden said that there was “no emergency” on Spanish debt markets, while Spain’s Economy Minister Luis de Guindos said the deal was “very, very positive”.
Eurozone ministers will not formally sign off on a memorandum of understanding accompanying the Spanish loan until a follow-up Eurogroup meeting, on 20 July, Eurogroup head Jean-Claude Juncker said. The memorandum sets out restructuring plans for banks receiving EU aid. The loans will be provided to banks, via Spain’s Fund for Orderly Bank Restructuring (FROB), from the European Financial Stability Facility, the €440 billion rescue fund that is part-funding the Greek, Irish and Portuguese bailouts. The loans will have to be repaid over 15 years and will be provided at lower than market rates - somewhere between 3% and 4% interes - and will add to the country’s debt-to-GDP ratio.
However, when the future European Stability Mechanism comes into force - it has still to be ratified by key eurozone states, such as Germany and Italy - that should assume the bank debt, shifting it off the government’s books. European Central Bank President Mario Draghi said that during the period before the ESM comes into force the bailout would be perceived by markets as a “temporary blip in the public debt” of Spain.
Spain was also granted a year’s extension on bringing its budget deficit down to the EU’s 3% of GDP limit after disappointing growth figures and overspending in the country’s autonomous regions made a 5.3% target for 2012 impossible to achieve. Spain will now have to reduce a deficit that topped 8.9% of GDP last year to 6.3% this year, coming down to 4.5% in 2013 and 2.8% in 2014.
The concession was linked to political horse trading over posts in the Eurogroup and the European Central Bank, with Juncker blocking the extension of Spain’s deficit deadline until he secured the nomination of Luxembourg’s Central Bank Governor, Yves Mersch, to the ECB’s Executive Board (see separate article). Mersch had been up against a Spanish challenger, Antonio Sainz de Vicuna, the head of the ECB’s legal department.
The Spanish banking crisis was precipitated by a capital shortfall in Bankia, Spain’s fourth largest bank, formed by the merger of seven cajas in 2010. In February, Spain told banks to put aside an extra 54 billion euro capital cushion to guard against future losses on their property portfolios, a figure that rose to 80 billion euro in May. In the interim, the Spanish government intervened with a 4.5 billion euro capital injection in Bankia, which rose to 23 billion euro in June, prompting the government to ask for EU help as its borrowing costs were too high to raise the money itself. The IMF and independent auditors have estimated Spain will need between 40 billion euro and 62 billion euro to fill the capital hole in the banks. The EU said, on 9 June, that it is prepared to lend Spain up to 100 billion euro.