BRUSSELS (MNI) – Contrary to some recent comments, Spain will not
need to provide the European Stability Mechanism with guarantees after
it take direct equity stakes in Spanish banks, the European Commission
said on Monday.

“I would like to clarify that there will be no need for a sovereign
guarantee from banks being directly recapitalised by the ESM,” a
spokesman for the Commission said.

The issue has become a matter of fierce debate among Eurozone
finance ministries now working to interpret and implement the broad
decisions taken by their heads of state and government at a summit at
the end of June.

At the summit, Eurozone leaders agreed after late night talks that
“it is imperative to break the vicious circle between banks and
sovereigns.”

They decided that once joint European bank supervision is
established, under the aegis of the European Central Bank, the ESM will
be able to recapitalize banks directly rather than lending the money to
the sovereign governments concerned.

The EU leaders also reaffirmed that for Spain, “financial
assistance will be provided by the EFSF until the ESM becomes available,
and that it will then be transferred to the ESM,” which will not take
senior creditor status, as markets had feared it would.

EU officials and the Commission agree that Spain must provide
collateral for the bank recapitalisation aid it is to receive – in the
form of loans to the government in Madrid – before the Eurozone has a
single bank supervisor in place. But they are sharply split over whether
collateral will still be needed after that.

Speaking to journalists ahead of a meeting of Eurozone finance
ministers on Monday evening, the Commission spokesman also said that the
Eurozone’s future bailout fund would be prepared to assume bank shares
acquired in recapitalisation programmes that are executed before the
common supervision system is in place, meaning that the debt assumed by
Madrid initially would eventually be taken off its books. That’s another
point that is not clearly spelled out in the summit’s statement.

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

[TOPICS: M$$CR$,MGX$$$,M$I$$$]