Spain secures bailout for its banks but with strings attached

Early on Tuesday morning the club of euro-zone nations signed an agreement that will mark both the Spanish economy and the country’s politics for a number of years to come. The Eurogroup meeting of economy and finance ministers agreed in Brussels to accord Spain the rescue package it requested last month for its banking sector (with the first 30-billion-euro tranche of the loan to be released before the end of July) and allowed Madrid an extra year to bring its budget deficit back within the terms of the Growth and Stability Pact.

Spain now has until 2014 to bring the shortfall in its books back within the 3-percent ceiling set by the EU, while the target for this year has been eased to 6.3 percent from 5.3 percent and to 4.5 percent in 2013 when it was originally due to hit the 3-percent limit.

But there were big strings attached, in particular stringent fiscal demands and complete oversight of Spain’s financial sector. In other words, Spain is the object of a bailout, in the full sense of the word, but one that is softer in its terms and scope than those of the three euro-zone nations intervened previously: Greece, Portugal and Ireland.

The so-called “troika,” comprising the European Commission (EC), European Central Bank (ECB) and the International Monetary Fund (IMF), will send inspectors to Spain every three months, and together these organizations assume de facto powers over the financial supervision of Spain’s banks. On top of this, Brussels has demanded “new fiscal measures” from Spain’s government on an immediate basis to ensure that Madrid can comply with its deficit-cutting obligations.

The center-right Popular Party administration of Prime Minister Mariano Rajoy anticipated this call on Monday by announcing that the VAT consumption tax would be raised at next Friday’s Cabinet meeting. But EC Vice President Olli Rehn added that Spain “will have to comply fully” with the new set of conditions and did not rule out extra austerity measures being asked of Madrid, such as possible cuts to pensions or unemployment benefits.

There has also been talk of the government suspending the extra payment made to civil servants at Christmas time, which would save the state some 4 billion euros. The government is due to meet with labor union representatives today.

The memorandum of understanding attached to the bailout has 32 conditions. These include the Economy Ministry ceding powers to the Bank of Spain, whose independence must be guaranteed; a reform of the savings banks that will bar them from controlling commercial banks; and a ban on savings bank directors sitting on the boards of commercial banks.

Banks will also be obliged to maintain a minimum core capital ratio of 9 percent through to 2014, while lenders will be classified into four groups according to their level of solvency. Healthy banks that do not need assistance such as Santander, BBVA and La Caixa as identified by the initial analysis carried out by independent consultants will be included in Group 0. Banks in Group 1 will include lenders that have been nationalized: BFA/Bankia, CatalunyaCaixa, NCG Banco and Banco de Valencia. Lenders in Group 2 are those that have failed stress tests but are capable of obtaining funding to boost their capital themselves, while those in Group 3 are those that also need to increase capital but are unable to do so without state aid.

The agreement also calls for the setting up of a so-called bad bank to absorb the toxic assets of banks.

Those banks that request funds will also be prevented from making bonus and dividend payments and be required to close branches, sell assets and, if it is deemed necessary, complete liquidation.

Banks receiving aid will also be given assistance to sell assets, while losses will be imposed on the holders of preference shares issued by them.

However, Economy Minister Luis de Guindos on Tuesday had insisted the two agreements did not entail “additional commitments of any type.”

The agreement reached by the Eurogroup — at a meeting that went on through the night for over nine hours — will be sealed formally on July 20. The first funds will then be released in the form of credit for Spain’s Orderly Bank Restructuring Fund (FROB), the state’s own bank rescue fund. The interest rate is expected to be set at around four percent over a 12.5- or 15-year loan period, although De Guindos indicated the rate could even be below 3 percent.

While Spain got some leeway from Brussels in meeting its deficit-reduction commitments, it missed out for the first time ever in securing representation on the key management board of the European Central bank.

The Eurogroup on Monday chose the governor of the Bank of Luxembourg, Yves Mersch, to replace Spaniard José Manuel González-Páramo as a member of the executive board of the ECB, beating out Spain’s candidate Antonio Sáinz de Vicuña, who currently heads up the ECB’s legal services department.

Belén Romana, Spain’s nomination for the head of the European Union’s permanent recuse fund, the European Stability Mechanism (ESM), also lost out to Germany’s Klaus Regling.

“The level of Spain’s institutional credibility is at its lowest ebb since the country joined the European Union,” a diplomat in Brussels said Monday.