BRUSSELS (MNI) – Eurozone governments would prefer to use the new
permanent bailout fund, the European Stability Mechanism, to finance an
aid programme for Spain’s banking sector, but assistance might have to
come from the European Financial Stability Facility if aid is called for
before the ESM is ready, a senior EU official on Tuesday.

“There is a strong preference by many members of the Eurogroup to
use the ESM, but in technical terms it depend on the [ESM's] entry into
force,” the official said.

“No one is ruling out the EFSF,” he said.

If an aid programme for Spain were to be finalized before the ESM
is ready, which should be by 9 July, then it would have to come at least
initially from the EFSF. The programme could then be handed over to the
ESM at a later date.

Whether the ESM will be ready on time is now unclear. On Monday
Italy’s European Affairs Minister, Enzo Moavero, warned that his
country might not be able to ratify the treaty creating the new bailout
fund on time, in which case, the ESM would not be able to proceed.

A spokesman for the European Commission on Tuesday said that he
expected the ESM treaty to be ready on time.

Eurozone finance ministers meeting in Luxembourg on Thursday are
expected to set the political terms for the structure and conditions of
an aid programme to recapitalize struggling Spanish banks.

As well as setting strict conditions on individual banks that
receive aid “there is also the distinct possibility that the
conditionality will extend beyond individual banks” to ensure the
conditions were right for the whole sector, the official with direct
knowledge of the negotiations said.

Spain’s Eurozone partners earlier this month pre-approved up to
E100 billion in aid to help the government recapitalize the country’s
struggling banks but Madrid is waiting for the completion of an
independent top-down analysis of the banking sector’s needs, expected
later this week, before finalizing its request for aid.

The government has also started work on a bottom-up analysis of
individual banks’ requirements that is expected to be ready “over the
course of the summer”.

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

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