The Euro zone nations have sealed a deal to provide rescue loans up to 100 billion euros ($122 billion) to Spain’s ailing banks amid speculation that debt-laden Spanish government may also eventually seek a bailout.
Finance Ministers of the 17-nation euro group finalised the details of a financial support for Spanish banks in a video conference on Friday, a day after the German parliament endorsed the rescue plan with a large majority.
They shared the view that “providing a loan to Spain for the purpose of recapitalisation of financial institutions is warranted to safeguard the stability of the euro area as a whole,” Luxembourg’s Prime Minister and President of the Euro group, Mr Jean-Claude Juncker said after their conference.
The Spanish government “will undertake full guarantee for the financial assistance”, he said in a statement.
The Ministers made their initial offer to help the Spanish banks on June 9 in an attempt to avert the banking crisis becoming a full-blown debt crisis of euro zone’s fourth largest economy.
The Spanish government made a formal request for support from the EU on June 25.
However, a surge in Spain’s borrowing costs in the past weeks to levels considered unsustainable in the long term fuelled new speculation that a bailout of the Madrid government will be unavoidable.
Spain’s borrowing costs for 10-year bonds on Friday shot up to 7.2 per cent, a level at which Greece, Ireland and Portugal have had to ask for financial support from the European Union and the International Monetary Fund.
The exact level of assistance to rescue the Spanish banks will be agreed upon by the European Commission, the International Monetary Fund and the Spanish government after the completion of audit of the financial institutions in September.
However, the ministers agreed that the first tranche of around 30 billion euros could be released by the end of this month or will be kept as a reserve to meet emergency needs, the statement said.
It will come from Euro zone’s temporary bailout fund, the European Financial Stability Facility (EFSF).