Spain given one year respite over budget

Eurogroup Juncker Schauble Nov 2011_Picnik.jpg

Eurozone ministers agreed early this morning (10 July) to grant Spain an extra year until 2014 to reach its deficit reduction targets in exchange for further budget savings and set the parameters of an aid package for Madrid's ailing banks.

The group is set to meet again before the end of the month to rubber stamp and approve the first €30 billion of Spain’s €100 billion bank bailout plan from the rescue fund.

Ministers also approved a grant to Spain of an extra year to meet its 3% deficit target, giving the stricken Iberian state until the end of 2014 to meet the target.

In a meeting which focused heavily on key appointments to European institutions, ministers discussed a memorandum of understanding that will govern the deal with Spain.



ESM issue is put to bed

“We are aiming at reaching a formal agreement in the second half of July, taking into account national parliamentary procedures, they are in for a first disbursement of €30 billion by the end of the month,” eurogroup chairman Jean Claude Juncker told reporters afterwards.

Ministers confirmed after the meeting that – subject to the condition that a European banking supervisor is in place – the European Stability Mechanism will eventually have the capacity to intervene directly in debt-ridden Spanish banks.

The issue caused uncertainty in the wake of last month’s (29 June) summit of heads of state and government in Brussels, following which reports suggested that Finland and the Netherlands were dissatisfied with the idea.

“It is important to tell the finance markets that when we, one day, have this European bank supervisor, (we) will probably introduce the possibility of direct access so that this is no longer calculated with the country debt,” German finance minister Wolfgang Sch?uble said after this morning’s meeting broke up.

Baptism of fire for Cyprus

Today (10 July), EU finance ministers from all 27 member states meet to discuss an agenda laden with issues likely to stoke animated debate.

The so-called “Two-pack”, including measures designed to rein in member states with struggling financial sectors, remains the subject of a bitter political discussion between the Council and the Parliament, which is seeking to make pan-European controls stronger.

Meanwhile the capital requirements directive – also on the agenda – is another area where Parliament is adopting a stricter tone, likely to irritate the UK.

A tough tour de table of ministers will see each give their views on draft recommendations for their economies prepared under the European Semester, where a number of member states are unhappy with what they have seen.

The least controversial item is likely to be the presentation by Cyprus its work programme for its six-month stint in charge of the council, but the meeting is likely to give its presidency a baptism of fire.

"The eurogroup has today reached a political understanding on the draft memorandum of understanding underlying the financial assistance for the recapitalisation of financial institutions for Spain, to be provided via the EFSF until the ESM becomes available and then transferred to the ESM without gaining seniority status," according to an official statement released by the eurogroup after the meeting finished in the early morning.

"The eurogroup envisages providing the final approval of the programme by July 20, after national procedures have been completed."

On Spain the statement said: "The eurogroup supports the recently adopted Commission recommendation to extend the deadline for the correction of the excessive deficit in Spain by one year to 2014.

On bank recapitalisation, it went on: "In order to break the vicious circle between banks and sovereigns, technical discussions on the future ESM direct bank recapitalisation instrument will also start in September so that the ESM could, following a regular decision, have the possibility to recapitalise banks directly, once an effective single supervisory mechanism is established."

Banks in eurozone countries that are complying with European Union budget discipline rules will be able to access the bloc's bailout funds directly, under an agreement announced last month (29 June) at a summit in Brussels. In addition, a new banking supervisory body will be created under the auspices of the European Central Bank.

Under the deal, struck after late-night talks between the 17 leaders of the eurozone, Italy, Spain and other troubled countries will also be able to tap the bloc's temporary EFSF and permanent ESM rescue funds to support their government bonds on financial markets.

  • 10 July: Finance ministers from EU 27 meet in Brussels today
  • 20 July: Further meeting/conference call of eurozone finance ministers to approve Spanish deal

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