Spain requests up to €100bn in European Aid

Spanish Economy Minister, Luis de Guindos, writes to eurozone finance ministers to formally request financial assistance

Luis de Guindos, the Spanish Economy Minister, who wrote to eurozone finance ministers to request financial assitance. Photograph: Getty Images

Luis de Guindos, the Spanish Economy Minister, has formally requested up to €100bn assistance to recapitalize Spanish domestic banks. This request has increased concerns amongst commentators that Spain will join Greece, Ireland and Portugal in requests for a full bailout in coming months.

In a letter to Jean-Claude Juncker, the Luxembourg Prime Minister and head of the eurogroup of eurozone finance ministers, de Guindos wrote:

I have the honour to address you in the name of the Government of Spain to make a formal request for financial help for the recapitalisation of Spanish financial institutions that may require it.

Spanish hopes are pinned on the agreement of the terms and conditions of such assistance in a Memorandum of Understanding before the Eurogroup meeting on 9th July.

Disagreements surround the nature of aid to be given to Spain. Firstly, the Spanish authorities have requested that any aid package be placed in the Fund for Orderly Bank Restructuring (FROB), from which the government would be able to direct money to banks in need as and when they request help.

German officials have, however, raised concerns about this system. Instead, they suggest that any financial help ought to be drawn directly by the banks in question from the European Stability Mechanism, to be launched in July 2012. The ESM would have seniority over the debt therefore offering greater safeguards for contributing nations in the case of a default.

There are questions over the beneficiaries of such a system. When Spain first requested financial aid on 9th June, bond prices in the nation plummeted. This was reported to be partially caused by the seniority of the ESM, which reduces the security of bonds for private holders. If the ESM oversaw all financial assistance, this may harm the private bonds market further.

A system in which banks applied directly for financial help in recapitalizing may also improve efficiency, as the mediation of the Spanish government would mean that it could take until September to get necessary funds to struggling banks. 

Further, there are questions around the conditions of financial assistance for Spain. One condition which is likely to be placed upon a loan would be the restructuring of the banking system. It is likely that contributor nations will require the creation of a toxic asset holding system, akin to current systems in place in Ireland and Germany. Such a system, in which toxic assets could be separated from functioning accounts, would help to minimize the impact of the crisis on the banks in question.

With a deadline of 9th July, not only questions of systems for distribution of funds and restructuring of the banking system, but also precise figures for the assistance, must be clarified soon. With a maximum request of €100bn, and an independent report by Oliver Wyman last week reporting that at least €62bn will be required, these are questions which could be of importance not just to Spain but to all other nations seeking assitance from an ever-reducing source.