The Eurogroup today gave the definitive approval to the program of assistance to Spain for the recapitalization of the financial sector. It is a loan of up to 100,000 million euros under very advantageous conditions, which will allow for a thorough improvement of the Spanish banking system, as an essential condition for the recovery of the economy and job creation. Today's step represents an example of political unity among the 17 countries of the Eurozone in the direction of consolidating the single currency as a common project. For Spain it means a commitment to consolidate and improve the solvency of the financial sector.
The agreement consists of the following documents:
to) Memorandum of Understanding (MoU) with specific conditions for the financial sector.
b) Financial Assistance Service Framework Agreement (FFA) with the conditions of the loan.
c) Decision of the European Council addressed to Spain on specific measures to strengthen financial assistance.
Additionally, Terms of Reference (TOR) on the role of this institution in the context of financial assistance to Spain have been agreed with the International Monetary Fund. It also includes the Collateral Agreement with Finland signed on July 16 between the Deposit Guarantee Fund and that country.
Memorandum of Understanding
to) Roadmap ("Road map"). The program lasts for 18 months; that is to say, it ends in December 2013. In July 2012, an amount that can reach 30,000 million euros will be available to meet the financing needs that may arise, especially in nationalized entities. In September, the capital needs for each entity will be known, according to the ongoing evaluation. The entities will be grouped into four categories: those that do not need capital, nationalized ones, those that need capital and public aid and those that need capital and can cover it with their own means. Before mid-October, banks must finalize their recapitalization plans and those that need help must present a restructuring plan.
b) Conditions for entities receiving aid. In accordance with European State aid regulations, banks in this situation must contribute to their restructuring with their own resources as much as possible, including the option that shareholders holding hybrid instruments and subordinated debt can assume losses. Entities may sell shares, non-strategic assets and delete offices and employees. Restrictions will be imposed on the remuneration of executives and members of the board of directors, in line with what is already foreseen in Spanish legislation. Lastly, the creation of an Asset Management Company is foreseen.
c) Horizontal conditions for the sector. All entities, whether or not they receive aid, will have to achieve a capital ratio of at least 9%. The current provisioning framework will be reviewed before December 2012. Improvements should be made in the corporate governance of savings banks and commercial banks and in the reporting requirements. The Banco de España reinforces its powers in the area of sanctions and licenses and will improve supervision procedures. A regulatory framework will be established for the orderly resolution of non-viable entities. Lastly, a reinforcement of the FROB and the Deposit Guarantee Fund and the consumer protection regulations are foreseen.
FFA content
The maximum volume of the loan will be 100,000 million euros. The exact amount to be used will be known once the bank-to-bank analysis is complete. It will be available until December 2013, so it is expected that there may be recapitalization operations until June 2013. The collection right of the fund it provides, that is, the European Financial Stability Facility (EFSF) will not have the status of creditor preferred over other commitments of the Kingdom of Spain. When the contract is transferred to the permanent fund, that is, to the European Stability Mechanism (ESM), it will also not acquire the status of preferred creditor.
A first tranche of € 30 billion will be available at the end of July. The rest will be disbursed in tranches in accordance with the schedule established in the Memorandum of Understanding. The interest rate is variable, reviewable every six months and will entail a series of expenses and commissions. The average maturity will be 12.5 years with a maximum term of 15 years. The FROB is an agent of the State in this contract.
