Eurozone agrees on softer deficit target, first tranche of bank bailout for Spain

Eurozone finance ministers agreed here early Tuesday to relax the deficit-cutting target for Spain and inject a first tranche of 30 billion euros (about 37 billion U.S. dollars) into the country's ailing banking sector by the end of the month.

Extra Year for Deficit Target

After nearly 10 hours of talks, eurozone finance ministers agreed to grant the Spanish authorities an extra year until 2014 to reach the EU public debt limit of 3 percent of its gross domestic product (GDP), Eurogroup President Jean-Claude Juncker said early Tuesday.

"We endorsed the extension of the deadline for the correction of the excessive deficit for Spain by one year to 2014," Juncker told a press conference.

The extension was based on "the significantly worsening economic situation in Spain and its impact on the budgetary situation," Juncker said, adding that the country has to implement all necessary measures to bring its public finances in line with EU norms.

Juncker's remarks came hours after EU officials told local media that the European Commission would propose allowing Spain to relax its deficit target for 2012 to 6.3 percent of GDP, an increase from an earlier target of 5.3 percent.

Under the terms, Spain will need to reduce its budget deficit in 2013 to 4.5 percent of GDP instead of 3 percent, and to 2.8 percent by the end of 2014.

Spain had revised its 2011 public deficit to 8.9 percent of GDP instead of 8.51 percent as reported earlier.

As part of the agreement, there will be specific conditions for specific banks, and the overall supervision of the financial sector will be strengthened, Juncker said.

"We are convinced that this conditionality will succeed in addressing the remaining weakness in the Spanish banking sector," he said.

The likely softening of the deficit target is expected to ease the country's financing pressure in the bond market as its ten-year bond yields rose back to above 7 percent this week, approaching euro-era highs.

Experts said even a deadline extension would be a huge burden for Spain, given the country's high unemployment, economic recession and failing banks.

The conservative government of Prime Minister Mariano Rajoy has pledged to cut Spain's public deficit to 5.3 percent this year.

Bank Bailout Blueprint

Finance ministers of the single currency area also agreed to inject 30 billion euros into Spain's banking sector, as the first tranche of a 100-billion-euro bailout, Juncker said.

The initial disbursement would be "mobilized by the end of this month as contingency in case of urgent need for the Spanish banks," he said.

The loans would be provided via the temporary bailout fund, the European Financial Stability Facility (EFSF), until the permanent fund, the European Stability Mechanism (ESM), becomes available, and then would be transferred to the ESM without gaining seniority status, he said.

The rescue program "will succeed in addressing the remaining weakness in the Spanish banking sector," according to Juncker, and was expected to be finally approved "in the second half of July."

The eventual goal is to use the euro area bailout fund to recapitalize banks directly instead of burdening the Spanish government with its debts, said Juncker, also prime minister of Luxembourg.

As a precondition for "direct recapitalization," the establishment of a single supervisory mechanism involving the European Central Bank (ECB)would be formally proposed by the European Commission in early September, the eurozone finance ministers said in a joint statement.

"We expect the European Council to consider these proposals as a matter of urgency by the end of 2012," said the statement.

Technical discussion on future ESM direct bank recapitalization will also start in September so that the permanent bailout fund "could have the possibility to recapitalize banks directly once an effective single supervisory mechanism is established," the statement said.

[Source: Xinhua, Brussels, 10Jul12]

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