ECB ratchets up pressure on Spain on bank bailout extension

Europe wants Madrid to extend maturity of loan as form of security

The European Central Bank (ECB), the International Monetary Fund (IMF) and other institutions are suggesting extending the deadline on Spain's bank bailout to cover future capital needs, high-placed ECB and IMF sources have confirmed.

Although the credit line expires on December 31, so far Spain has only asked for 41.3 billion euros out of the 100 billion that the EU made available a year ago. The Spanish government has no inclination to use the rest of the money, claiming that the improvement in market conditions allows it to provide its own funds if necessary. But in view of upcoming bank stress tests by the ECB that could demonstrate further need for financial cushions, institutions feel that extending the deadline by a few months may be a good idea.

For now, Madrid hotly denies that it will be asking for more funds. The government contends that it has its own resources to cover unexpected capital needs: there are sufficient funds in the Bank of Spain's Orderly Bank Restructuring Fund (FROB), while the Treasury could always finance itself with relative ease if the banking sector failed to do so on its own.

Madrid will only consider turning to the European bailout fund if the beneficial effects were to surpass the political stigma that comes with it, and as long as uncooperative EU members do not demand unacceptable conditions in return.

"The program is achieving its goals and the situation of the Spanish banking sector is improving, but it remains fragile," an EU source said. "That is why it is necessary to complete its application and watch the risks in connection with the economy and the real estate sector. We will assess the situation again in the fall and we will see what to do about it then."

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