It is believed the sum of funds being asked for would be in the region of €100billion.
The formal request follows weeks of rumours in the media and denials from the Spanish government that the country would ask for assistance for the country’s struggling banks. Prime Minister Mariano Rajoy had refuted claims that his country would need such a bailout and continues to deny that the deal will in fact be a ‘proper’ bailout. The Spanish government is hoping that any cash they receive will be sent straight to the banks, not being counted as sovereign debt in the process, a suggestion that the Germans appear to be opposed too.
De Guindos said in his letter to Euro group chairman Jean-Claude Juncker that the total amount of the financial assistance would be set at a later stage but that it should be enough to cover all banks’ needs plus an additional security buffer. He also confirmed his intention to sign a Memorandum of Understanding for the package, which would include full details, by July 9.
The European commission’s vice president Olli Rehn said in a statement: “Restructuring the banking sector is key to reinforce the confidence in the Spanish economy and to restore the conditions to proper access to credit by companies and households, thus for sustaining the recovery.
The policy conditionality of the financial assistance, in the form of an EFSF/ESM loan, will be focused on specific reforms targeting the financial sector, including restructuring plans which must fully comply with EU state-aid rules. Conditionality will apply to banks being recapitalised and to the Spanish financial sector as a whole, including its supervision and regulatory requirements.”
Observers and investors will be looking to the bailout to ease the sense of fear and concern that has become resident in the Eurozone. Open Europe’s head of economic research, Raoul Ruparel, said:
“Funding for the Spanish banking sector is an incredibly fluid target and could go well beyond €100bn if the situation in the Spanish and Eurozone economy continues to deteriorate. Though it comes with merits, if not carefully managed and subject to the right conditions, this package could merely serve to deepen the dangerous loop between Spanish banks and government without offering a clear solution to the crisis. In turn, if more pressure is piled on Spanish banks and therefore government debt, it could force Spain into a full Eurozone bailout.
With Spain facing funding costs of €548bn over the next three years, the euro zone’s bailout funds are not equipped to handle a Spanish rescue. To avoid such a scenario, the current bank bailout plan just has to come with the right conditions – including losses for bank bondholders and bank wind-downs.”
It remains to be seen whether Rajoy gets his way over the deal. The embattled Prime minister is desperate to avoid Spain being put under the same strict rules as Greece, Ireland and Portugal.
So far the news hasn’t seen the Euro make any major gains in the currency markets. Once the details of the deal are unveiled we are sure to see some movement. Investors are waiting to see whether the meeting of European Union ministers to be held on Thursday is going to create any solid plan for solving the Euro crisis. Expectations aren’t very high.
The Pound to Euro exchange rate is currently trading at 1.245
The Pound to US Dollar exchange rate is currently trading at 1.555
The Euro to Australian Dollar exchange rate is currently trading at 1.248
The Euro to US Dollar exchange rate is currently trading at 1.248
The Euro to Pound exchange rate is currently trading at 0.802
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