Spain bailout will not require troika

Spain’s bank bailout of up to €100bn will not involve a troika overseeing its finances, but their banks can expect conditions and regular on-site inspections.

The financing agreed by eurozone finance ministers over two conference calls on Saturday will initially come from the same source as that of Ireland, Portugal and Greece — the European Financial Stability Fund.

But when Ireland got its €45bn from the EU’s bailout funds in Nov 2010, there was no separate provision for money to pay banks’ debts, as EU leaders refused to link the sovereign crisis to the banking crisis.

At any rate Ireland had already assumed all responsibility for the banks having guaranteed all their debts.

The terms of the EFSF were changed eight months after Ireland’s bailout, and while the money to rescue the Spanish banks still has to go through the state’s book and Spanish taxpayers are liable for it, the conditions attached are different.

Spain will have to sign a memorandum of understanding that will set out what happens to the banks that receive the money — whether they be wound up, merged, sold off or sell their assets.

The banks will be subject to continuous monitoring by the European Commission and the European Central Bank, with inspections to ensure they are complying with the conditions.

But there will be no troika monitoring the state’s finances since the money is not going to bail them out.

However, they are on a very short leash under the terms of the so-called excessive deficit procedure applied to all eurozone countries with an annual deficit of more than 3% of GDP. It was 8.5% last year and they have until 2014 to bring it below 3%.

The Government has insisted the Spanish deal strengthens its hand in getting a cheaper way of handling the €31bn IOUs the State gave in the Anglo Irish Bank bailout and cutting the cost of the interest rate in the vital post-2013 years when Ireland is expected to return to the markets for funding.

The Government hopes the focus on Spanish banks will encourage EU leaders to look more benignly on Ireland’s arguments to cut the cost of its bank bailout, and push the ECB, which is central to such a decision but so far the most reluctant.

Spain has been arguing ferociously behind the scenes for the past few weeks that if it was to take a loan, it would be only for its banks. It pushed hard that the money would not be routed through the state and so appear on the debt, arguing that it would create uncertainty on the markets and push up borrowing costs.

But this would have required a change to the rules of the new bailout fund, the ESM the European Commission has argued for. There were fears such a change would mean the German parliament would vote against the ESM treaty on July 1.