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Euro-zone ministers agree on Spanish banking bailout

by Renee Cordes in Brussels | Published July 10, 2012 at 10:53 AM

Euro-area finance ministers early Tuesday, July 10, agreed on the broad outline of a bank bailout package for Spain, offering an immediate €30 billion ($36.9 million) by the end of this month to help Madrid prop up its ailing lenders.

The political understanding, reached after nine hours of talks in Brussels, is to be formally agreed by July 20, with the full amount needed in Spain expected to be around €100 billion. "We reaffirm our strong commitment to do whatever is necessary to ensure the financial stability of the euro area," the finance chiefs said in a statement.

Speaking to journalists, Luxembourg Prime Minister Jean-Claude Juncker said the initial cash injection will be "mobilized as a contingency in case of urgent needs in the Spanish banking sector." During the meeting, finance chiefs voted to extend Juncker's term as chairman of euro finance meetings, though he has said he will step down in late 2012 or in early 2013.

Initially, Spain will receive the money through its Fondo de Reestructuración Ordenada Bancaria, or FROB, banking restructuring agency. Once a single European banking supervisor is in place, the goal would be to channel the cash directly to lenders in the region's fourth-largest economy directly from the euro-zone's bailout fund.

The European Union already has a London-based European Banking Authority that coordinates a network of national supervisors and conducts regular stress tests, but it has no real enforcement powers. The idea under discussion calls for a central supervisory authority with real power to shut down failing banks or order them to come up with more capital. Such a body is also seen as a prerequisite for bypassing national governments and directly giving bailout money from central EU coffers. However, important details remain to be resolved.

Paul Donovan, London-based senior global economist with UBS, said that it's "good news" that Spain may receive European bailout money without having to take additional debt onto its government balance sheet. But, he asks, "if Spain is permitted to retrospectively turn government debt into euro-group debt... what about Ireland or Portugal, or Cyprus or Greece" and other countries that have bailed outbanks using government money without EU assistance? "Where do you draw the line?"

"As ever," he added, " Europe throws up at least as many questions as it answers."

Madrid has pledged to set up a separate company to manage assets of banks requesting European support. Spanish lender have an estimated €180 million of bad assets on their books as a result of a property slump now in its fifth year.

The European Commission has promised to present a proposal for legislation for a banking supervisor by the end of this year, although EU governments disagree about what a single regulator's responsibilities should be.

Olli Rehn, the EU's economic and monetary affairs commissioner, told journalists overnight that the Commission would have a proposal for a European banking regulator, involving the European Central Bank, by early September.

He also said that by September the Commission would start preparing the direct recapitalization instrument for lenders through the European Stability Mechanism, the EU's permanent bailout fund which will replace the current, temporary European Financial Stability Facility.

"Direct bank recapitalization will enable us to break the vicious circle between banks and sovereign risks," he said.

As for the euro zone's most pressing problem, he said, "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."

On Tuesday, EU Internal Market Commissioner Michel Barnier said the Commission still had a lot of work to do in drafting its proposal for a banking supervisor, still in the "early stages."

Separately on Monday, European Commission antitrust officials wrapped up their last state aid investigation of a German lender when they agreed on a 2008 German bailout of Munich-based BayernLB.

The accord calls for BayernLB to sell its mortgage-lending unit, LBS Bayern, to Bavaria's savings banks, which will also increase their stake in BayernLB by converting a so-called silent participation, a type of investment which confers no voting rights, into equity.

"We have reached an agreement on a restructuring plan that will reduce the scope of the business model of BayernLB but will give strength to the business model and to the bank," EU Competition Commissioner Joaquín Almunia told journalists in Brussels.

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