Euro Zone Offered

Devan Biswas
10 Jun, 2012
New York City

Euro zone finance ministers agreed to extend

[R]12:40 PM – Euro zone finance ministers agreed to extend €100 billion to Spain after a hastily agreed meeting on Saturday to thwart the widening debt contagion. Spanish minister said the final amount of bailout will be determined after an independent bank audit and will exclude the IMF.[/R]

Spain reluctantly agreed to bow under the pressure from the euro zone leaders and Germany and formally requested a bank bailout.

The euro zone ministers of 17 nations in a hastily arranged meeting on Saturday agreed to offer as much as €100 billion after tense negotiations that lasted more than 150 minutes.

The agreement was announced in a press conference by Spanish Economy Minister Luis de Guindos in Madrid on Saturday. The “loan” at cut rate is expected to cover the need of capitalization of banks and additional safety margin to sustain the economic needs that will be routed through the Spain’s FRBO fund.

Nearly one third of Spain’s banks are bankrupt after a sustained real estate bubble that was initiated by the rising capital flows from the euro zone agencies and fueled by the elevated and speculative investments from British pensioners for second home purchases.

After seven years of economic boom, feasted on reckless investment in construction sector, home prices in far away cities jumped more than five-fold. Several banks offered loans to borrowers with no collateral and or income verification and developers went on a speculative building binge.

At a news conference, Guindos said, “The Spanish government declares its intention to request European financing for the recapitalization of the Spanish banks that need it.”

Though the amount of the bailout funds and details of conditions are not finalized but they are likely to be less onerous that the one offered to Greece and Ireland.

Spain has put several deficit cutting measures in place in the last two years but the key demand of the government to extend the loans directly to banks without the government guarantees is not likely to be met. However, another key demand of Spanish government of a limited role of the International Monetary Fund appears to be agreed by the euro zone leaders.

The IMF will act only in observatory capacity of banks and will not provide any lending to Spain, unlike its role in the Greek, Irish and Portuguese bailout.

Financial markets on Monday are expected to rally on the announcement but are expected to struggle ahead of Greek election on June 17, the meeting of political leaders of G20 in Mexico City and the European Union leaders meeting at the end of the month.

Market faith in Spanish government was shaken after the botched handling of Bankia, created from the recently merged seven local banks. Bankia requested €23.5 billion of government bailout only months after its management and Bank of Spain had assured markets that the newly formed organization was “healthy.” The central bank’s reputation is also tarnished after Bank of Spain insisted several times earlier in the year that Spain does not need bank bailout.

Germany, European Central Bank and European Commission leaders urged Spain to accept the bailout ahead of deepening financial contagion despite the resistance from Spanish Prime Minister Mariano Rajoy.