Eurozone loans Spanish banks €100bn

Eurozone finance ministers paved the way for their first direct bank recapitalisation when they unanimously voted to lend €100bn for Spanish banks.

However, the move did little to calm the euro crisis and reassure markets as the price of Spanish bonds surged to a new record.

The taxpayer will remain on the hook for the money for at least the next year, which will maintain the link between the banks and the sovereign until the EU’s new bailout fund, the ESM, comes into force in 12 months.

Ireland is closely watching the Spanish bank bailout as EU leaders agreed that Dublin would benefit from new arrangements to facilitate the needs of Spain.

Pressure is growing on the sovereign, with Valencia becoming the first region to officially look for emergency aid from the country’s newly created liquidity fund, while the full extent of the banks’ problems will not be known until September, after stress tests are completed.

Spain has been resisting pressure to apply for a bailout. During the week prime minister Mariano Rajoy pushed through further austerity measures.

Spain must adhere to a reform programme and reduce its deficit to below 3% by 2014 — an extra year conceded last month.

Public anger has been fed by the fact senior bondholders will not suffer losses while small depositors who sold equity when they thought they were putting their savings into more profitable savings accounts stand to lose their money. The state is expected to provide some compensation.

Pushing for parliament to pass the new cuts and tax increases, Cristóbal Montoro, the finance minister, warned that without them the country would run out of money to pay pensions and salaries.

This did little to reassure markets that pushed bond costs up over the 7% mark earlier this week for the first time — the rate at which Ireland and Portugal were forced to accept a bailout.

The first tranche of €30bn will be available swiftly to show there is funding ‘in the bank’.

The final batch of restructuring plans are not expected to be submitted until next June, but could result in a massive restructuring of 90% of the country’s banks

The loans of up to 15 years at an interest rate of between 3% and 4% will come from the existing bailout fund, the EFSF, but will be transferred to the ESM when it comes into force and gets powers to lend directly to banks.

Markets react badly to deal

Markets have reacted negatively to the memorandum of understanding prepared by eurozone finance ministers to bail out the beleaguered Spanish banking system. Moreover, the memorandum could have negative implications for the Irish Government’s attempts to get back on the sovereign debt markets.

Yields on 10-year Spanish bonds surged through the 6% level following the release of the memorandum.

Goodbody stockbrokers economist Dermot O’Leary said the memorandum suggested the Spanish government would ultimately be liable for the €100bn bailout fund. “The belief after the last EU summit was the banking losses would be shared, which was seen as very positive. But now after the Spanish [memoran-dum] it looks as if the Spanish government will be liable. That would suggest that the EU summit was not as significant as it was originally seen.”

Michael Noonan, the finance minister, has repeatedly said that if Ireland could get a deal on the bank debt, then it would improve the country’s chances of getting back on the bond markets.

But Mr O’Leary says the Spanish memorandum does not augur well for an Irish debt deal.

“It does not have a negative read through for the negotiations on the Anglo Irish promissory notes because these are technical discussions with the troika,” he said.

“But there is a negative read through for negotiations on a deal for the debt of the pillar banks [AIB and Bank of Ireland].”

— John Walsh