Mario Draghi, the president of the ECB with Pierre Moscovici, France's finance minister, and Luis de Guindos, Spain's finance minister. (Efe)
Brussels will impose harsh conditions in change for the rescue of the Spanish banking sector. After nine hours of negotiations, the 17 finance ministers of the Eurozone closed an agreement in the early hours Tuesday over the credit line of up to €100bn to recapitalize troubled financial institutions in Spain.
The Eurogroup leaders agreed to make a first transfer of €30bn by the end of this month, which will serve as a “contingency in case of urgent needs in the Spanish financial sector,” according to Jean-Claude Juncker, the head of the group.
Apart from this, Spain will benefit from a direct recapitalization to its banks from the European rescue funds and will not have to guarantee these injections.
Juncker answered with a concise “yes” to the question whether the agreement by the heads of states and governments in the last European summit will arrive on time for Spain. The formal agreement on the bank rescue plan is expected to be approved on July 20.
Creation of bank supervisor
The condition imposed by the finance ministers for this rescue plan is the creation of a European bank supervisor, with the participation by the European Central Bank.
According to the Eurogroup, the European Commission will present its suggestions for the creation of the new supervisor by the beginning of September, while the European Council will handle it in an “urgent” manner before the end of the year.Juncker also clarified that the Spanish state will not have to guarantee the aid that will be injected directly into the banks once the mechanism for direct recapitalization enters into effect.
The president of the Eurogroup revealed that the loan will expire in 15 years, with an average of 12.5 years. With this first part of the rescue package, the government will help the nationalized banks, including Bankia –which will need €19bn to clean up its balance sheet–, CatalunyaCaixa, Novagalicia and Banco de Valencia.
The Eurogroup will take the formal decision for the European aid on July 20, according to Olli Rehn, deputy president of the European Commission. The Finnish commissioner also explained that there will be conditions that are both specific for the rescued banks and for the sector as a whole. At the same time “Spain will have to fully comply” with the requirements related to reducing its deficit, he said.
That means that the government will be obliged to increase value-added taxes, eliminate tax deductions for real estate investments and introduce other measures in order to comply with recommendations from Brussels in change for the funds.
Budget deficit target postponed
On Monday evening, Prime Minister Mariano Rajoy’s government was given one more year to comply with the deficit target, and in return, the country must commit to push forward more economic reforms and to control spending in the autonomous regions.
Spain will have until 2014 to reduce the deficit from the current level of 8.9 percent to 3 percent. This year, the target will be 6.3 percent instead of 5.3 percent that was initially agreed. In 2013, the deficit will have to drop to 4.5 percent, and finally to 2.8 percent in 2014.
The European partners will also give Spain a period of three months for the “government to adopt efficient measures” and they will evaluate how the deficit progresses quarterly.
No key economic positions to Spain
The meeting also agreed on appointments to some of the key economic positions in the Eurozone, but none of the charges was given to Spain, which lost a seat it traditionally holds in the Executive Committee of the ECB and also failed to achieve a seat in the management team of the European Stability Mechanism (ESM).
The seat in the ECB committee, held by Spaniard José Manuel González-Páramo until May 31, will be taken over by the governor of the Central Bank in Luxembourg, Yves Mersch.
This article was translated and edited by Stina Lunden.
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