EU aid offer buys Spain more time

EU finance ministers have agreed on a $36.7bn bailout, but the plan may be delayed by legal and bureaucratic wrangling.

    European Union finance ministers have bought Spain more time to revive its sickly economy, offering 30bn euros ($36.7bn) to save the country's banks and protect Europe from more debt contagion.

    Battling against relentless market pressures, the ministers promised to provide the funds this month with $123bn potentially available in all.

    At the same time, they agreed to extend a deadline for Spain to cut its public deficit to the EU's three per cent limit by one year to 2014 "on account of adverse economic circumstances," an EU statement said on Tuesday.

    The size of Spain's economy in 2011 is estimated to have been $1.5 trillion.

    Olli Rehn, EU Economic and Monetary Affairs Commissioner, welcomed the decision by the council to give Spain an extension to get the country's deficit under control.

    Spanish Economy Minister Luis de Guindos said the "two agreements are very positive," giving the recession-hit nation the time and the money "to thoroughly clear up the banking sector".

    The rescue will be finalised at a special eurozone meeting on July 20 because countries such as Germany must first get parliamentary approval for the deal.

    Additionally, Finland will not participate in the euro zone's planned aid for Spanish banks by the end of this month unless the two countries can agree on collateral before then.

    EU officials differed on the timing of a plan, agreed at a June 28-29 summit, to use the eurozone rescue fund to directly recapitalise ailing banks in a bid to break the "vicious circle" of private and government debt.

    Critical timing

    The deal eased pressure on bond markets on Tuesday.

    The return on Spain's benchmark 10-year bond fell below the red line of seven per cent while Italy, also in the crosshairs, saw its interest rate drop under six per cent.

    European stock markets gained but lost some of their shine in late trading, while the euro tumbled as low as $1.2235 at one point, the lowest level since July 1, 2010.

    Italian and Spanish borrowing costs had surged on Monday on scepticism that the Eurogroup meeting of finance ministers would amount to much.

    Madrid has sought to avoid any deal that would impose the kind of austerity and structural reforms that have been forced onto bailed out Greece, Ireland and Portugal.

    Italian Prime Minister Mario Monti, meanwhile, said Rome may one day ask for the eurozone rescue to intervene in the bond market in order to ease his country's borrowing costs.

    De Guindos said on Tuesday the plan to channel aid directly to banks through the European Stability Mechanism (ESM) would "take place rapidly" after the setting up of a eurozone-wide banking supervisor.

    But German Finance Minister Wolfgang Schaeuble warned that its creation "will take time (because) it is complex, and not easy to achieve."

    The German Constitutional Court on Tuesday weighed complaints against the $614.2bn ESM and the European fiscal pact for greater budgetary discipline as Schaeuble urged the court not to delay Europe's new permanent bailout fund and budget discipline pact.

    Schaeuble told the panel of eight judges that the measures were "important steps toward a European stability
    union", adding that Germany's approval of them would send a "clear signal that solidity and solidarity belong together".

    SOURCE: Agencies


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