BRUSSELS (MNI) – Eurozone finance ministers agreed early Tuesday to
disburse an initial tranche of E30 billion in aid to Spain by the end of
the month and agreed on the outline of a plan to rescue the currency
bloc’s fourth-largest economy’s troubled banking sector.

The E30 billion first tranche was a “contingency in case of urgent
needs” Eurogroup President Jean-Claude Juncker said.

Final approval of the rescue deal, which will impose conditions on
the banks receiving aid and on the Spanish banking sector in general is
expected on 20 July when Eurozone finance ministers will discuss the
issue again, possibly in a teleconference.

The total amount of aid Spain will draw down from the E100 billion
that its Eurozone partners have set aside will depend on a bottom-up
assessment of how much individual banks require, but bottom-up plans for
14 banks accounting for about 90% of the Spanish banking system’s assets
should be completed towards the end of September, an EU official said.

Eurozone finance ministers agreed that loans to Spain, which will
initially be channeled through the European Financial Stability Facility
before being transferred to the European Stabilty Mechanism without
gaining seniority status, would have a maximum maturity of 15 years and
an average maturity of 12.5 years.

“Asset realization proceeds would be earmarked for early
repayments,” Juncker said.

Under the terms of the aid deal, troubled real-estate assets
choking Spanish banks would be transferred to a new ‘bad bank’, a
measure that Madrid had previously rejected.

Eurozone ministers also appeared to have quashed an internal
dispute over whether Spain would be required to provide guarantees for
its aid after it has been transferred to the ESM.

Asked whether Spain would have to provide guarantees after the ESM
takes over the programme, Eurogroup president Jean-Claude Juncker said
“no.”

“I think the word, the concept ‘direct’, is a very clear concept,”
added EU Economics and Monetary Affairs Commissioner Olli Rehn. ” This
is a direct bank recapitalisation, not an indirect one via the state.
But there is a very clear and necessary condition that there has to be
an effective and well-functioning single supervisory mechanism for banks
that are part of this arrangement” he said, referring to the Eurozone
leaders’ agreement last month.

Work will begin on the details of the ESM’s direct recapitalisation
abilities in September, the Eurozone finance ministers said.

Klaus Regling, the head of the European Financial Stability
Facility, ducked the question. “The ESM is not operational. We are
planning now everything for the bank recapitalisation in the case of
Spain, via the EFSF,” he said.

Before the aid is transferred to the ESM, however, Spain will be
expected to provide guarantees, the European Commission said on Monday.

As widely anticipated, the ministers also agreed to give the
currency bloc’s fourth-largest economy one extra year to bring its
fiscal deficit below the EU’s 3% ceiling because of the country’s
worsening economy.

Spain will now be expected to lower its fiscal deficit to 6.3% of
GDP by 2011, instead of 5.3%, and to bring it down to 4.5% by 2013 and
2.8% by 2014.

EU Economics and Monetary Affairs Commissioner Olli Rehn held out
the prospect of an extension last May, provided that Spain brings the
spending of its regional governments under control and presents a budget
plan for up to 2014.

Madrid would need to make take additional deficit cutting measures
soon, Rehn said.

Turning to Ireland, the Eurozone finance ministers agreed to
re-examine the country’s bailout programme to its “sustainability” in
September.

“Similar cases will be treated equally, taking into account changed
circumstances,” they said in a statement.

On Slovenia, Juncker said that the small, former Yougoslav republic
had “no intention” of seeking Eurozone assistance and that Slovenian
banks that need to be recapitalized would likely be able to do so
without Eurozone assistance.

Eurozone finance ministers also finalized an agreement on three
hotly-contested job positions, hammered out by EU leaders behind closed
doors at last month’s summit, handing Luxembourg, population 500,000,
two of the most important economic posts in the Eurozone.

The ministers agreed that Luxembourg’s Prime Minister Jean-Claude
Juncker should continue as president of the Eurogroup and that the
country’s central bank governor, Yves Mersch would be appointed to the
ECB’s Executive Board.

Germany’s Klaus Regling, the current head of the European Financial
Stability Facility, will become head of the European Stability
Mechanism, they agreed.

Juncker, however, said that he would step down “well before” the
official end of his two-and-a-half-year term, possibly “by the end of
this year or early next year”, a condition designed to appease national
sensibilities in other EU member states to seeing Luxembourg take both
the influential positions.

Governments have urged Juncker to stay on as Eurogroup President
because they could not find enough backing for any other candidate.
Germany Finance Minister Wolfgang Schaeuble, the leading alternative,
has been ruled out by at least a third of Eurozone countries wary of
German dominance of the group, MNI sources say.

The appointment of the hawkish Mersch, over Spain’s Antonio Sainz
de Vicuna, is a diplomatic victory for the Eurozone’s ‘northern’
members who had backed Mersch’s candidacy and marks the first time that
one of the Eurozone’s four largest economies have been deprived of a
seat on the ECB board.

–Brussels newsroom: +324-9522-8374; pkoh@marketnews.com

[TOPICS: M$$CR$,M$X$$$,M$$EC$,MGX$$$,MFXBO$,MT$$$$]