Spain bailout

The eurogroup noted the Spanish government had already imposed tough austerity measures on its own and said it believed Madrid would continue on that path independently of the bailout programme.
“The eurogroup is confident that Spain will honour its commitments under [EU budget rules],” the statement said. “Progress in these areas will be closely and regularly reviewed also in parallel with the financial assistance.”
A senior European official said that while International Monetary Fund experts would help run and administer the bank rescue programme, the IMF itself will not contribute any of the funds, a break from all earlier eurozone bailouts.
While previous bailouts amounted to full-scale macroeconomic adjustment programmes, IMF rules prevent it from lending to a rescue that only targets financial institutions, according to the official.
Eurozone leaders did not specify whether the money would come from the current €440bn rescue fund, the European Financial Stability Facility, or the new €500bn fund, the European Stability Mechanism. The senior official said it could be a combination of the two, since the ESM is due to go into force next month.
Loans from the EFSF do not have preferred seniority status; under the terms of the ESM treaty, however, loans from the ESM take priority over all private sector debt, potentially spooking Spanish sovereign bond markets.
The decision to seek aid was reached less than 24 hours after the IMF issued a 77-page report on the Spanish banking sector that found it was suffering through a crisis “unprecedented in its modern history”.
IMF officials recommended new capital injections of at least €40bn, but they noted the weakest banks’ needs “would be larger than this” once all bad loans were accounted for and restructuring costs taken into account.
The decision by eurozone finance ministers to act before independent auditors hired by Madrid issue their report on the banking sector reflected officials’ desire to shore up Spain before the potentially destabilising elections next weekend in Greece.

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