Euro states to speed Spanish bank aid

European governments will jump-start as much as 100 billion euros (Dh451.3 billion) in loans to shore up Spain’s banks and may move the costs off the Spanish government’s balance sheet in an effort to shield the Euro-region’s fourth-largest economy from the debt crisis. Thirty billion euros will be lent by the end of July with the goal of eventually using the Euro-area bailout fund to recapitalise banks directly instead of saddling the Spanish government with the debts, Luxembourg Prime Minister Jean-Claude Juncker said. The initial cash will “be mobilised as a contingency in case of urgent needs in the Spanish banking sector,” Juncker told reporters early on Tuesday in Brussels after chairing a nine-hour meeting of Euro-region finance ministers. The programme “will succeed in addressing the remaining weakness in the Spanish banking sector.” European governments frontloaded the Spanish aid, held out the prospects of concessions to Ireland and promised to avert a cash crunch in Greece after last month’s summit-level pledge to calm markets failed to prevent a resurgence in the two-and-a-half-year-old debt crisis. Cash injections A four-day slump in Spanish and Italian bonds highlighted sagging confidence in the crisis response, especially after the European Central Bank showed no signs of restarting its bond- buying programme. Ten-year bonds now yield 6.98 per cent in Spain and 6.07 per cent in Italy, compared with 1.32 per cent in Germany. While the loans to Spain will go via the government’s bank-restructuring agency, the aim is to convert them into direct European cash injections once the setup of a single European bank supervisor makes that approach feasible, Juncker said. “Then there will be no sovereign guarantee required,” said Thomas Wieser, in charge of the senior officials’ group that prepared the decisions. Political hurdles remain to retrofitting the aid programme, and how it will be organised was left unclear. “We’ll argue for the retroactivity,” French Finance Minister Pierre Moscovici said. German Finance Minister Wolfgang Schaeuble said the Spanish government would be liable initially and didn’t address the issue of eventually converting the loans into direct aid. Single bank supervisor Spain will set up a separate company to manage assets of banks tapping European support. Banks are sitting on about 180 billion euros of troubled assets linked to the real-estate industry as a property slump enters its fifth year. The maturity of loans to Spain, starting from the European Financial Stability Facility, will average 12.5 years and run as long as 15 years. The programme will be taken over by the permanent bailout fund, the European Stability Mechanism, set to go into operation in the coming weeks. Euro officials continued to spar over the timetable for the setup of a single banking supervisor that would make a switch to direct recapitalisation possible. The European Commission, which proposes European laws, expects to “have this in place by year-end,” Financial Services Commissioner Michel Barnier told a European Parliament committee. Other officials have said the second half of 2013 is more likely. Germany’s Schaeuble said “it will take time, it’s complicated, it isn’t easy to do.” Stress tests European banks that took part in last year’s capital stress tests have “largely raised” the 114.7 billion euros in fresh capital required by the European Banking Authority, according to a memorandum prepared for EU finance ministers for a Brussels meeting later on Tuesday that was obtained by Bloomberg News. The “capital shortfall identified” has “been largely raised from private sources and where necessary public backstops were activated,” according to the document. The detailed EBA report with the final endorsement of the individual results will be published in September. In a concession to Spain that may hint at future leniency for Greece, the euro ministers gave Spanish Prime Minister Mariano Rajoy’s government an extra year, until 2014, to drive the budget deficit below the euro limit of 3 per cent of gross domestic product. Revised targets of 6.3 per cent in 2012, 4.5 per cent in 2013 and 2.8 per cent in 2014 are “a challenging but achievable objective, but above all, it is a necessary objective,” EU Economic and Monetary Commissioner Olli Rehn said. ‘Flexible and efficient’ Ireland responded by stepping up calls for what Finance Minister Michael Noonan called an “ambitious” renegotiation of the terms of its 67.5 billion-euro bailout. Juncker said tweaks to the programme are conceivable by October. Monday’s increase in Spanish and Italian borrowing costs relative to German levels nullified gains made in the wake of the June 29 euro summit commitment to intervene in bond markets “in a flexible and efficient manner.” Those powers won’t be fully available until the permanent fund, the 500 billion-euro ESM, goes online. Plans to declare it operational yesterday were thwarted by a German constitutional challenge and ratification delays in Italy. Until the ESM gets going, Europe’s defences will be limited to the 240 billion euros left in the temporary EFSF, set up in May 2010. It will be phased out once governments start pouring capital into the ESM. ECB bond purchases “This ESM today should be in action, and it is not and we do not know when it will be in action,” Ewald Nowotny, Austria’s representative on the ECB council, said at a panel discussion in Brussels. “This is of course something that tends to undermine the credibility of the decisions that we take at summits.” Italian Prime Minister Mario Monti, who doubles as finance minister, pressed his case for steps to reduce Italy’s bond yields, whether using the euro bailout fund or the ECB. The ECB went a 17th week without settling any government bond purchases, the bank said yesterday, keeping on hold a market-calming step used from May 2010 until February 2012 amid growing opposition from the Germans on its council. The central bank is probing “all ideas” and “constantly studying and searching for actions that could attenuate the current crisis,” ECB President Mario Draghi told Monday’s EU parliament committee hearing.