Spain: Eurogroup approves Spain bailout
July 24, 2012
On 20 July, Euro area finance ministers formally approved a financial assistance programme in order to recapitalize the Spanish banking system. The loan will cover financing needs of up to EUR 100 billion, although the specific amount will not be determined until a comprehensive assessment of individual banks is finalized in September. The aid will be provided by the European Financial Stability Fund (EFSF) until the European Stability Mechanism (ESM) becomes available; it will then be transferred to the ESM without gaining seniority status. However, under the agreement reached at the EU summit on 28-29 June, the ESM will only become operational when a single EU banking supervisory authority is established, which is not expected to take place before 2013. In return for the financial assistance, Spain will have to restructure its financial sector and improve banking regulation. The aid will be channelled through Spain's state-run bailout fund (FROB, Fondo de Reestructuracion Ordenada Bancaria), and then redirected to the financial institutions, once their restructuring plans are approved. Contrary to previous statements, in which European authorities declared that the bailout package intended to break the vicious cycle between banks and sovereigns, according to the document, the Spanish government will retain the full responsibility of the financial assistance. As a result, the announcement failed to calm investors, and yields on Spanish bonds skyrocketed to new highs, reaching 7.6% on 24 July, with the spread against German Bunds soaring to 638 basis points. Yields above 7% are generally considered unsustainable and mark the level where Ireland and Portugal were forced to seek protection. High financing costs combined with Spain's mounting fiscal woes are causing an increasing number of analysts to speculate that Spain will be forced to ask for a full bailout in the near future.