In a teleconference on 20 July, the euro-area finance ministers (the Eurogroup) unanimously agreed to grant financial assistance for the ongoing recapitalisation and restructuring of Spain's financial institutions. The conditions agreed are set out in a Memorandum of Understanding to be signed in the next few days.
The overall goal of the agreement is to increase the resilience of Spain's banking sector, with the aim of restoring access to the markets on affordable terms, which had suffered as a result of the recent real estate bubble and subsequent economic recession.
The conditions agreed include specific requirements for banks that are unable to meet their capital shortfall without public support, and address the need to strengthen Spain's financial and regulatory framework.
In a statement, the Eurogroup said that it "is convinced that the reforms attached to this financial agreement will contribute to ensuring a return of all parts of the Spanish banking sector to soundness and stability".
Main features of the Memorandum of Understanding
The agreed amount of assistance (covering the capital requirements of the banks in question and an additional safety margin) is up to 100 billion euro. The exact amount will be established after stress tests on 14 banking groups (about 90% of the Spanish banking system) have been concluded in September this year.
The financial assistance will be provided as a loan to the Spanish government. It will be disbursed in several tranches via the European Financial Stability Facility (EFSF) and later transferred to the European Stability Mechanism (ESM), without gaining seniority status.
The first disbursement – 30 billion euro – will be prefunded and kept in reserve by the EFSF, to be used in case of urgent need in the Spanish banking sector before the results of the stress tests are known.
The funds will be received and distributed to the financial institutions concerned by the Spanish Fund for Orderly Bank Restructuring (FROB), which will act as the Spanish government's agent.
Requirements for banks
Banks requiring state aid for recapitalisation will have to undergo restructuring. The restructuring plans may include downsizing of unprofitable activities, de-risking through separation of the most problematic assets, and other steps.
In addition, the banks will as far as possible have to contribute to the cost of restructuring from their own resources and to provide details of their actions in order to minimise the cost for taxpayers.
In the case of non-viable banks, the Spanish authorities will have to submit an orderly resolution plan.
Spain will have to review its financial regulatory framework: among other things, increasing transparency in financial sector reporting, and enhancing supervision.
In parallel, it will have to honour its commitment to correct its excessive deficit by 2014 and to undertake the necessary structural reforms in the context of the European Semester.
The European Commission, in liaison with the European Central Bank (ECB) and the European Banking Authority (EBA), will regularly review implementation of this condition.
The Spanish authorities asked for external financial assistance on 25 June this year. The Eurogroup agreed to grant it following an assessment by the Commission, the ECB and the International Monetary Fund, on grounds that such assistance would help to safeguard financial stability in the euro area as a whole.
Statement by the Eurogroup (full text, pdf)
Memorandum of Understanding (pdf)
Financial Facility Agreement between the EFSF and Spain (pdf)