Herman Van Rompuy, after the European summit concluded yesterday in Brussels. (Efe)
There is nothing for free. This message was delivered by Herman Van Rompuy, the president of the European Council, after the summit between the European leaders concluded in Brussels on Friday.
In the outcome document, the council included the recommendations previously presented by the European Commission for Spain, which means the Spanish government will now have to follow them.
The detailed conditions for financial aid to recapitalize banks, however, which the meeting decided will not be channeled through states, remains to be defined.
The document only says that the European Stability Mechanism (ESM) could be the mechanism that will be used, and for certain once it cedes to be the preferred creditor in the case of Spain.
The decision to use the ESM, however, will not enter into effect until the European Central Bank will have established a new banking supervising agency, which is likely to enter into effect by the end of 2012.
No details on Spain’s rescue yet
The details of the conditions for the rescue of the Spanish banking sector, which will add up to about €60bn, will be not specified until the Eurogroup meets on July 9.
During the first phase, however, this amount will be channeled through the Spanish government, which will accumulate it as debt as it will be responsible for the repayment of the loan to the Eurozone.
Until the new stability mechanism enters into effect – which still needs to be ratified by some parliaments – the Spanish state will thus be under the pressure from higher debt.
An intermediate period
During this intermediate period - from the moment of signing the memorandum that will define the details of the aid to Spain until the new ECB supervisor will be established - the recapitalization of the banks could be delayed a few months, given that when the total amount will be defined – close to 6 percent of Spain’s gross domestic product – it will count as sovereign debt, which could be punished by the markets.
The EU, however, will not transfer the money in one single payment but according to a timetable that will agreed in advance in line with the conditions for the loan, which will be “strict,” according to the president of the ECB, Mario Draghi.
The summit thus left many questions open. The nature of the banking supervision also remains to be defined. All that is known is that it will be done under article 127.6 of the EU Treaty, which gives the council the right to entrust the ECB specific assignments with respect to policies related to the supervision of the credit institutes and other financial entities, with the exception of insurance companies. This will be discussed by the European finance ministers in the Ecofin meeting.
A longer version of this article is available in Spanish here.
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