Madrid makes formal request for banking-sector bailout

Just four paragraphs to fire the starting pistol on what will be one of the most important periods in modern Spanish history -- Economy Minister Luis de Guindos has finally sent the letter to his EU colleagues on the Eurogroup, in which Madrid formally requests a rescue package for its beleaguered banking sector.

The Ministry has confirmed the letter has been dispatched, but its contents give few clues as to the eventual nature of the bailout, information eagerly awaited by investors. The initial mood of the markets on Monday morning was negative, with Spain’s risk premium rising above 500 basis points once more and the Ibex 35 stock market index falling by two points.

The letter does not say how much of the 100 billion euros offered by the EU earlier this month Spain will require. Instead it expects to avail itself of the credit line in tranches. De Guindos’ letter does accept that, at least initially, it will be the government’s own Orderly Bank Restructuring Fund (FROB) that will receive the money, accepting for now that the German government has won the argument on who should ultimately be responsible for the funds.

The government of Prime Minister Mariano Rajoy had wanted the bailout funds to go directly to the banks in need of them, thus preventing the loan from counting as increased state debt. In the letter, which De Guindos directs to the president of the Eurogroup, Luxembourg Prime Minister Jean-Claude Juncker, the Spanish minister pointedly keeps the door ajar on possible changes to the European rescue fund’s rules, referring to different possible instruments “that may be decided on in the future.”

“I have the honor of writing to you in the name of the Spanish Government to make a formal request for financial assistance for the recapitalization of the Spanish financial entities which require it,” the letter begins.

There now opens a period of debate on the precise terms of the banking bailout before an intended deal at the Eurogroup meeting on July 9.

Independent auditors fixed the needs of the Spanish banking sector at around 60 billion euros last week.