Cause and Effect in European Politics and Law

No Sovereign Guarantees for the Spanish Bank Recapitalisation Loan

Ralitsa Kovacheva, July 10, 2012

The loan to Spain will be finally approved by 20 July and the first tranche of 30 billion euros will be available to the country by the end of the month. This became clear at an early morning briefing of the Eurogroup. Although the eurozone finance ministers have already identified the maximum loan amount of 100 billion euros, the exact amount needed is not yet clear. Stress tests will be conducted to assess the needs of each bank, as specific conditions will be placed on each financial institution. At the last night's meeting, the Eurogroup reached a political agreement on the Memorandum of Understanding underlying the financial assistance for Spain. As already mentioned, the loan will be allocated by the EFSF (the temporary bailout fund) under the current rules and then it will be transferred to the ESM once the permanent fund becomes operational. The state will not take any guarantees for the loan, European representatives reiterated.

Comments in the opposite direction caused another jump of the Spanish borrowing costs, exceeding a level of seven percent on Monday. "I think the word, the concept ‘direct’ is a very clear concept. This is direct bank recapitalisation, not indirect through the sovereign," EU economic and monetary affairs commissioner Olli Rehn explained."But there is a very clear and necessary condition: there has to be an effective and well-functioning single supervisory mechanism of banks that are part of this arrangement,” he added. In other words, the possibility of direct recapitalisation of banks in the euro area by the rescue funds will be practically usable only when there is a common supervisory mechanism.

However, this is not a reason for speeding too much up the work on this mechanism, it is better to get things done properly, ECB President Mario Draghi warned at a meeting with members of the Economic Committee in the European Parliament. He repeated his words from last week that even if a loan aimed at bank recapitalisation went through the government and increased government debt, it would be only "a temporary blip in public debt". Once the new supervisory mechanism is in force and the loan is transferred to the ESM under the new conditions, these liabilities will be removed from the state balances, Mr Draghi assured. The ambition of the European institutions is the proposal for a single supervision of banks in the euro area to be presented by the Commission in early September and be approved as a matter of urgency by the Council and Parliament until the end of the year.

Together with the loan conditions, the Eurogroup endorsed the Commission recommendation to extend by one year (until 2014) the deadline for correction of the Spanish excessive deficit. The new targets set by the Commission provide for a deficit of 6.3 percent this year, 4.5% for 2013 and 2.8% for 2014. Commissioner Olli Rehn did not answer a journalist's question whether Spain in return would have to reduce social benefits and pensions, but admitted that the country would have to take additional measures rather soon. By the end of July, the government in Madrid must adopt a two-year budget plan under the new deficit targets and then the answers to these questions will become clear, Olli Rehn said.

With regard to Ireland, at the summit in late June the eurozone leaders decided that it can also benefit from the new "flexibility" of the rescue funds as a reward for the good performance of its economic programme. It will be discussed in September how exactly this would be done. Meanwhile, Cyprus will sign a classic, fully-fledged rescue programme, and the Greek programme will be discussed again in September.

Surprisingly, there was no mention at the press conference of the issue of Finnish and Dutch resistance against the leaders` decision the ESM to buy sovereign bonds of troubled countries, without requiring a rescue programme to be signed (but subject to compliance with the recommendations of the Council on their budgetary and economic policies). Ahead of the meeting the Dutch finance minister Jan Kees de Jager reiterated the country’s position that lending more money to countries like Spain and Italy would not solve their fiscal problems nor will it save the euro. In the final statement of the eurozone finance ministers the possibility of more "flexible and efficient use" of the existing tools of the rescue funds is again mentioned but without any specific details. An agreement is signed between the temporary rescue fund EFSF and the ECB providing for the central bank to conduct market operations on behalf of the fund and financed by the fund, so the purchase of government bonds not to affect the ECB balance sheets. The same agreement will be signed with the permanent rescue fund ESM as soon as the Treaty establishing it enters into force.

Jean-Claude Juncker has been re-elected president of the Eurogroup for another two and a half years. However, he explained that he would not finish the term, but would resign at the end of this year or early next year. Mr Juncker was expected to be succeeded by German Finance Minister Wolfgang Schaeuble, but after the change of power in France rumours appeared that Paris was lobbying for the French finance minister, Pierre Moscovici, to be appointed Head of the Eurogroup. He himself said that France had made no demands in this regard. EFSF managing director Klaus Regling will lead the permanent fund, the European Stability Mechanism. It is expected the fund to be operational as soon as the ratification procedures in member states are completed.