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SOVEREIGN DEBT CRISIS

Brussels holds back bailout funds until needs of banks clarified

EU may wait until end of November for bank bailout

At the end of July, the Economy Ministry announced that “in a question of days, or at the most weeks,” 30 billion euros of emergency funds would be transferred to Spain from Brussels. The money was to form the first part of the European bailout of Spain’s banks, with a total of 100 billion euros due to be used to recapitalize the country’s stricken lenders. The majority of the money was destined for Bankia, which has requested 19 billion euros of assistance.

But the announced dates have come and gone, and the check has not arrived. Sources from the European Union have explained that the European Central Bank (ECB) and the European Commission were unwilling to release the funds because they would rather not touch the European Financial Stability Facility (EFSF), the special purpose vehicle set up to deal with the sovereign debt crisis. What’s more, they believe that more detail is needed first about the needs of Spain’s banks.

The Spanish government sent Brussels the plans for the four lenders that had been nationalized: Bankia, CatalunyaCaixa, Novagalicia Banco and Banco de Valencia. But Brussels has decided that it would rather wait for the analysis of the entire sector that’s currently being carried out by the consultancy firm Oliver Wyman, which will be released at the end of September. The EU has also questioned the amount that has been requested by Spain, because it believes that the creation of a so-called “bad bank” will alter the situation of the Spanish lenders, given that it will take on a large part of their problematic toxic real-estate assets.

The EU is likely to wait until the end of November to clear up the details of exactly how much the banks need. That was a huge disappointment for the Economy Ministry, which had already publicly stated that the money would be in the hands of the lenders by the beginning of August.

On Friday, Bankia — which urgently needs an injection of capital — presented its results, with losses of 4.448 billion euros up until June. This hole in its balance sheet has left the bank with less than the minimum capital requirements.

Given the situation, the government has opted for a Plan B, and has gone to the Orderly Bank Restructuring Fund (FROB), which is run by the Bank of Spain and the Economy Ministry. The FROB has announced that it will inject 4.5 billion into BFA-Bankia so that it recovers its solvency levels.

Bridging loan

This money is considered a “bridging recapitalization” — i.e., an advance of the money that Bankia will get from Brussels. Once the EU has transferred the rescue funds, the FROB will get back what it is putting into the lender.

Until now the FROB has had assets of 4.139 billion euros, but sources with knowledge of the matter say that it has sufficient resources to loan a greater amount without financial problems.

According to the Economy Ministry, there have been no serious disagreements with Brussels, as was clear from a statement released on Friday by the Eurogroup. The group, which is made up of the finance ministers of the euro zone, said that it was in favor of the FROB’s plan to make the immediate injection of capital into BFA-Bankia ahead of the EU assistance.