Spanish recession targeted

The first instalment is part of an emergency €100bn aid initiative agreed in June to inject some much needed funds into the wavering economy and to prevent any further downward spiralling by the banks.

EU heavyweights have also decided to give the region an additional year to try and get its budget deficit back in line with a lower GDP target. Last year, Madrid overspent by 8.9 percent, and the 2014 goal is expected to be as low as 2.8 percent. According to a draft reviewed by the WSJ, “tweaking Spain’s budget targets would let the capital run a deficit of as much as 6.3 percent gross domestic product this year, instead of 5.3 percent, without risking financial penalties.”

At a conference in Brussels, Eurogroup President Jean-Claude Juncker said he was convinced the loan will “address the remaining weakness in the Spanish banking sector.”
“We are aiming at reaching a formal agreement in the second half of July, taking into account national parliamentary procedures, allowing for a first disbursement of €30bn by the end of the month to be mobilised as a contingency in case of urgent needs in the Spanish banking sector,” he said.

The prime minister of Luxembourg also reminded Spain it will be accountable for an overhaul in the way the country’s banks supervise and regulate funds, as is customary with any EU monetary bailout. “The key component of the programme is an overhaul of the weak segments of the financial sector,” said Juncker.

Early reports suggest the initial aid will be channelled through the Spanish government’s FROB bailout fund, but once a new banking supervisor is appointed, it will be sent straight to the crippled banks.

Figures from Monday’s market closures suggest Spanish bonds and equities were on the up after the loan announcements were made, sending the yield down as much as six points to 6.99 percent. A yield above seven percent is said to be unstable in the long term, especially in light of the interest rate Spanish governments will have to pay back borrowed money.

The final loan agreement to the region is likely to be announced by the EU on July 20, but the overall amount needed by Spain’s banking sector will not be known fully until September.