European Finance Ministers Agree to Speed Up Bailout of Spanish Banks

15 january 2013

BRUSSELS — With Spain’s borrowing costs climbing again to critical levels, European finance ministers decided early Tuesday to speed up their promised bailout for the country’s troubled banks, while also giving the cash-tight government more time to rein in its budget deficit.

After nine hours of debate, ministers from the 17 euro zone nations reached a tentative agreement on the bailout terms, including a “first disbursement” of 30 billion euros, or $37 billion, by the end of the month, Jean-Claude Juncker, president of the Eurogroup of finance ministers, said at a news conference.

That amount is “to be mobilized as a contingency in case of urgent needs in the Spanish banking sector,” he said. Additional payments — up to 100 billion euros was pledged last month — would most likely follow in the fall, after a more thorough review of the sector’s problems, he said.

At the same time, Spain’s targets for cutting its gaping budget deficit will be eased as the country sinks deeper into its second recession in three years, with an unemployment rate of almost 25 percent. But the ministers demanded that Spain squeeze its austerity budget even tighter to meet the new targets.

“I would expect that some additional measures will have to be taken rather soon,” the European Commission’s vice president, Olli Rehn, said at the news conference.

For its part, the European Commission had proposed that Madrid’s deficit target this year be relaxed to 6.3 percent of gross domestic product, from 5.3 percent earlier. Madrid also would get an additional year — until 2014 — to bring the deficit below 3 percent of G.D.P., which is the target for all euro zone countries.

That proposal — which the Eurogroup accepted and all 27 European Union finance ministers were to expected to endorse later Tuesday — plays into the debate over terms for the loan to bail out Spanish banks.

The Eurogroup agreed last month to make up to 100 billion euros available to the banking sector with only limited new conditions — on the understanding that Madrid would continue to meet the budget targets set by the commission.

Euro zone officials said the new conditions would include “bank-by-bank stress tests,” to be conducted by external consultants, and overall strengthening of regulation and supervision. Banks determined to be in need of direct aid will first have to segregate their failing assets and transfer them to an external agency, officials said.

The “political agreement” on the so-called memorandum of understanding now needs to be ratified in some countries by parliaments, meaning another Eurogroup meeting would need to be called afterward to complete it. The Spanish economy minister, Luis de Guindos, said he expected the definitive agreement on July 20.

As an immediate follow-up to the summit deal, the European Central Bank signed an agreement with the existing bailout fund, the European Financial Stability Facility, to allow it to act as agent for buying government bonds on the secondary market on the fund’s behalf. To avoid adding to the pile of shaky government debt already on the bank’s books, “all financial risks and benefits” from any new purchases would be transferred to the facility’s balance sheet.

Amid evidence of falling tax revenues, Cristóbal Montoro, the Spanish budget minister, indicated for the first time on Monday that his government was likely to bow to European pressure and raise the rate of the value-added tax, a form of sales tax.

At a conference outside Madrid, Mr. Montoro also outlined plans to extend working hours for civil servants. He did not give a timetable for the measures but Mariano Rajoy, the prime minister, is due to address Parliament on Wednesday.

Ahead of the Eurogroup meeting, European officials sought to dispel doubts about a deal struck last month to break the “vicious circle” between shaky banks and weak governments. And the European Central Bank reaffirmed that it stood ready to do more to stem the crisis — within the limits of its mandate — while urging euro zone governments to press ahead with closer integration.

“We look with interest to all ideas,” the central bank’s president, Mario Draghi, told a committee of the European Parliament. But “effective crisis resolution,” he added, “also needs bold actions by other policy actors, notably governments.”

Pressed to relieve some of the mounting market pressure on Spain and Italy, another weak economy that also has one of the highest debt loads in Europe, European leaders agreed at a summit meeting last month on a number of short-term measures, including using the bailout funds to directly recapitalize shaky banks and to buy government debt to help bring down borrowing costs.

The possibility of direct injections of capital was meant most immediately to help Spain, which is under pressure because of concerns that, by borrowing from the bailout funds to recapitalize its struggling banks, it would simply swell its public debt burden.

The interest rate, or yield, on Spanish 10-year sovereign bonds spiked above 7 percent again Monday, after dropping to near 6 percent in the days after the summit meeting on June 29.

Suggestions last week that national governments would have to assume ultimate liability for banks that are rescued with euro zone bailout funds had taken some of the luster off the summit deal. That prompted the European Commission on Monday to “clarify” that “there will be no need for a sovereign guarantee for banks being directly recapitalized” by the soon-to-be-established permanent bailout fund, the European Stability Mechanism.

“Direct bank recapitalization will enable us to break the vicious circle between banks and sovereign risk,” Mr. Rehn said.

He and other officials stressed, however, that the summit agreement mandated that a new, “single supervisory mechanism” for euro zone banks had to be put in place before direct bank recapitalizations could be made.

Mr. Draghi, whose institution will play a leading role in the new supervisory system, underscored in his testimony Monday the amount of work that still remained to secure a detailed agreement on a banking union.

He said that there were three views about how many institutions need to fall under European supervision. One would include just systemically important banks that operate across borders, another would also include large banks that operate only in one country, and a third would encompass all banks.

“But all banks, that is about 6,000 or more,” he said. “I think in answering these questions, we should never forget we will rely on national supervisors. We won’t start from scratch.”

Officials said the European Commission would present a proposal by early September, and the whole process will most likely take until the end of this year.

“Everyone knows that setting up European bank supervision isn’t a small thing, it’s a huge task,” the German finance minister, Wolfgang Schäuble, said.

Mr. Draghi said, however, that the time frame “is not a big problem” because any bailout money delivered to governments now to recapitalize banks could be transferred later off the government’s books.

“It would be temporary, a temporary blip in public debt,” he said.

Other countries, like Ireland and Greece, hope to benefit eventually as well. Allowing the stability mechanism to directly recapitalize Greek banks would knock some 50 billion euros, or $62 billion, off the country’s sovereign debt, which stands at around 330 billion euros.

Spain is not the only country facing rising borrowing costs. Italian 10-year bonds topped 6 percent on Monday, after dropping to around 5.5 percent last week. German 10-year bunds, the European standard for safety, were at 1.3 percent, down from 1.5 percent last week.

Also on Monday, the euro zone finance ministers agreed to appoint Yves Mersch, the head of Luxembourg’s central bank, to the European Central Bank’s six-member executive board. The seat has been empty since May 31, with the expiration of the term of José Manuel Gonzalez-Paramo, a Spaniard. Spain had pushed to hold on to the seat.

Mr. Juncker, who had said he would step down as Eurogroup president after his third term expires this month, was appointed to another term, following resistance in Paris to Berlin’s preferred replacement, Mr. Schäuble. But Mr. Juncker said he did not intend to serve the full 2 1/2-year term, and would step down by early next year at the latest.