The EU’s finance ministers have agreed on the general terms of a bailout for troubled Spanish banks which will likely total €100 billion, with €30 billion set to be paid out this month.
In a meeting that started on Monday night and concluded early yesterday morning, the eurozone’s finance ministers – the Eurogroup – agreed on the terms of the bailout, although the agreement will only be finalised on 20 July after the necessary approval is obtained from national governments or parliaments, Eurogroup president Jean-Claude Juncker said.
The first €30 billion in aid should be ready by the end of this month, according to the Eurogroup. The exact amount of the bailout is not likely to be known until September, when assessments of different Spanish banks are set to be concluded, but is expected to reach €100 billion.
Mr Juncker explained that banks which receive a bailout will be forced to adopt specific conditions, and that the supervision of the financial sector overall will be strengthened. The conditions imposed on bailed-out banks are set to include a cap on bank executives’ salaries and a ban on bonuses.
The Eurogroup re-elected Mr Juncker, who is also Luxembourg’s prime minister, to a new 30-month term. However, he has declared his intention to step down late this year or early next year.
Ministers also chose German economist Klaus Regling, who currently heads the eurozone’s temporary bailout fund, to head its permanent replacement – the European Stability Mechanism. The ESM was originally set to begin operations last Monday, but has been delayed pending ratification by European states.
At the Economic and Financial Affairs Council (Ecofin) meeting later yesterday, the EU’s 27 finance ministers approved extending of Spain’s deadline to achieve a budget deficit within the 3% of GDP threshold to 2014.
The extension granted to Spain may lead Greece to ask for one, according to Greek Finance Minister Ioannis Stournaras.
“I think the size of the recession justifies, as Spain got an extension, that we should ask for an extension,” he said, adding that he recognised that it was too early to expect a formal decision on the issue.
Discussions at the Eurogroup and Ecofin meetings also focused on a proposed “banking union” which would see an EU-wide banking supervision system set up.
Some disagreements still need to be sorted out, a number of ministers cautioned.
Briefing the press after the two meetings, Finance Minister Tonio Fenech noted that ministers diverged on whether the banking union should cover the entire EU or just the eurozone. Malta, he said, favoured an EU-wide system, adding that it made sense to have a single system covering the single market.
European Central Bank chief Mario Draghi was optimistic that a deal would be reached before long when he addressed a European Parliament committee ahead of the meeting.
“We are going as fast as we can. It is better to do things right than in a hurried fashion. We certainly want to see this thing wrapped up by the end of the year,” he said.
“By the end of this year we will have something that is not perfect, but achievable.”
Mr Fenech also stressed that there was the need to break the link between government debt and that of financial institutions, echoing arguments made by a number of his counterparts and by Economic and Monetary Affairs Commissioner Olli Rehn.
Mr Rehn announced that the Commission would put forward legislative proposals for the creation of a single supervisory mechanism in September and pointed out that this mechanism would allow the ESM to lend directly to banks – instead of lending to a country’s government and increasing its debt load.
Discussions, Mr Fenech said, also focused on Cyprus’ plan to ask for a bailout to help shore up its own banks, which are heavily exposed to Greek debts. This bailout, according to reports, may total €10 billion – over half the country’s GDP.
The situation in Ireland and Portugal – which have already received bailouts – was another topic under discussion. Mr Fenech noted that Ireland was registering encouraging progress, which may allow it to conclude its bailout programme sooner than expected: The situation in Portugal, on the other hand, was still being assessed.
On a more local perspective, Mr Fenech stressed that he reiterated concerns expressed by Prime Minister Lawrence Gonzi at last month’s Council meeting. These included pointing out that while Malta favoured further economic integration, it drew the line at surrendering national sovereignty over taxation policy, as well as disagreements with the Commission’s recommendations to raise the retirement age and revise the budgetary cost of living adjustment (COLA) payments.