Eurozone starts giving shape to Spanish bank aid

Roddy Thomson
European Central Bank president Mario Draghi (L) speaks with Spanish Finance Minister Luis De Guindos before an Eurozone Coucil at the Kirchberg conference centre in Luxembourg. The eurozone started tackling conditions on Thursday for financial aid to Spain's banks, while arguing over a revision sought by Greece's new government of its bailout

The eurozone started tackling Thursday conditions for financial aid to Spain's banks, while arguing over a revision sought by Greece's new government of its bailout.

Eurozone finance ministers opened talks in Luxembourg, with International Monetary Fund managing director Christine Lagarde also attending as the world awaits solutions to the two-year debt crisis.

Spanish Finance Minister Luis De Guindos said his country would officially request aid for its stricken banks "in the coming days."

"It's a mere formality," De Guindos said on arrival for the meeting. "Today we are here to explain the situation with the Spanish banking sector."

Audits released by the the Bank of Spain showed that lenders there could need up to 62 billion euros ($78 billion), with the tests delivering a bottom-of-the-range figure of 16 billion euros.

Two weeks ago, the eurozone had said it would be willing to lend Spain up to 100 billion euros.

In the meantime, and with an eye particularly on Spain and Italy, a financial sector source told AFP on Thursday that the European Central Bank is set to loosen the criteria on collateral required from commercial banks in exchange for central bank funds.

The decision is expected to be announced on Friday, the source added.

The pressure intensified against Spain on Thursday as the interest demanded by investors soared in a new bond sale, leaping to 4.706 percent for two-year bonds, more than double the rate charged in a March sale.

But Madrid showed it can still tap the market at a pivotal time, with the Treasury raising 2.22 billion euros despite fears mounting that a state bailout could follow the bank recapitalisation.

There remains debate about the terms and conditions, with Irish Finance Minister Michael Noonan -- whose country received a bailout that included 24 billion euros for the banks -- arguing Europe should "separate banking debt from sovereign debt."

"To recapitalise banks and transfer accounting onto the sovereign seems an additional burden," Noonan added.

Thursday's talks, which will widen Friday to include the finance ministers of Britain and other non-euro states in another tough fight over calls to introduce a tax on financial transactions, are part of a marathon series leading up to a full European Union summit next week.

On Friday, the leaders of the eurozone's big four -- Germany, France, Italy and Spain -- stage a mini-summit in Rome, where they are expected to elaborate a plan for the eurozone rescue funds to intervene more easily on bond markets.

Berlin has declared itself sceptical.

By Thursday and Friday next week, the eurozone is expected to have agreed the short- and long-term shape of a banking or financial union and steps towards closer political integration that economists see as essential to getting to the root of the debt crisis.

The United States, the IMF and the European Central Bank have all urged greater banking integration in Europe, as the debt crisis boomerangs from financial sectors to sovereigns.

The ministers were also facing a demand from the newly-announced Greek government line-up to change the terms of its EU-IMF rescue.

The new ruling coalition said it wanted "to revise terms of the loan agreement without endangering the country's European course and its place in the euro."

But hardliners Finland and the Netherlands immediately signalled opposition.

Asked whether Greece could be given more time to honour its commitments, Finland's Finance Minister Jutta Urpilainen said: "I don't think it's a good idea."

Dutch Finance Minister Jan Kees De Jager said room for maneouvre would be "extremely limited."

Germany, which also wants Athens to stick to the plan agreed, was embarrassed on Thursday when a court forced its president to delay ratification of a Berlin-inspired fiscal treaty at the root of the EU's response to the debt crisis.

The delay threatens to push Germany beyond the EU agreed deadline of July 9

Ratifcation of the new eurozone's permanent bailout fund, the ESM, is also being held up. The fund is supposed to begin operations on July 1.

Cyprus will probably seek eurozone aid for its ailing banks next week, after securing a separate bilateral loan from Russia, an EU diplomat said Wednesday.