Debt Crisis: Eurozone to Lend Spain 100 Bn Euros to Shore Up Banks

Spain has secured a European lifeline of up to 100 billion euros to shore up its teetering banks.

Eurozone agreed on Saturday to lend Spain up to 100 billion euros ($126 billion) to save its stricken banks and try to avert a broader financial catastrophe after emergency talks with its eurozone partners. Photo: El Mosquito Querétaro/Flickr

After the 2-hour video conference the 17 eurozone finance ministers revealed they “willing to respond favourably” to a Spanish plea for help.

“The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to €100bn in total,” a Eurogroup statement said.

In the video conference on the agenda was the IMF’s report into the health of the Spanish banking system. The IMF rushed its report out in the early hours of yesterday, some 48 hours ahead of schedule, underlining the severity of the situation, writes The Telegraph.

In its report IMF said that although Spain’s largest banks had enough capital to survive further deterioration, several banks would need to increase capital buffers by a combined €40bn.

Which is more, the actual requirement could be far greater, depending on restructuring costs and the reclassification of mortgages. Ceyla Pazarbasioglu, deputy director of the IMF’s Monetary and Capital Markets Department, said in the report:

“Going forward, it will be critical to communicate clearly the strategy for providing a credible backstop for capital shortfalls — a backstop that experience shows it is better to overestimate than underestimate.”

According to RTE News, Spain asked for financial aid for its banks but would not specify the precise amount until two independent consultancies – Oliver Wyman and Roland Berger – deliver their assessment of the banking sector’s capital needs.

The IMF promised that in the wee hours of Saturday that Spain’s bad loan-saddled banks will require between 40-60 billion euros ($50-75 billion) in fresh capital to shore up their books, while above mentioned consultancies are to deliver their findings by June 21.

“The Spanish government declares its intention to request European financing for the recapitalisation of the Spanish banks that need it,” Economy Minister Luis de Guindos said in a press conference in Madrid.

He added that the amounts required would be manageable, and that the funds requested would amply cover any needs.

De Guindos continued, saying the “financial assistance has nothing to do with a rescue,” and described the aid as “a loan the (Spanish banks) will receive under very favorable conditions to be determined in the coming days” and adding that the package will alleviate market pressure on Spain.

Spain’s request for assistance comes less than two weeks after Prime Minister Mariano Rajoy said the Iberian nation would need no external aid to recapitalize its ailing lenders, reports Fox News.

“The Eurogroup supports the efforts of the Spanish authorities to resolutely address the restructuring of its financial sector and it welcomes their intention to seek financial assistance from euro area member states to this effect,” its statement said.

After the video conference, Eurozone leader said the amount of the proposed aid package is sufficient to cover “all possible capital requirements estimated by the diagnostic exercise which the Spanish authorities have commissioned to the external evaluators and the international auditors.”

Washington, which is worried the euro zone crisis could affect U.S. economy in an election year, welcomed the announcement.

“These are important for the health of Spain’s economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area,” U.S. Treasury Secretary Timothy Geithner said.

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