The Eurogroup (EMU ministers of Finance) had a follow-up meeting on the June 29 EU-Summit yesterday. All in all, most of the outcome was already known from the Summit. Therefore, the market reaction should be modest today. Regarding Spain, they first of all reached a political understanding on the draft MoU for the Spanish bank bailout. Final approval is expected by July 20.
According to officials, the creation of a bad bank and further in-depth stress tests for 14 banks will be part of the programme. The latter could take until September to determine the exact amount of money needed, but ministers agreed to ready €30B by the end of this month in case any banks need to be recapitalized urgently. Spain would also have to undergo an overhaul in its banking regulation and supervision. Secondly, they confirmed that the ESM will be able to inject cash directly into the Spanish banks, once a single eurozone banking supervisor is created (proposal due September). Until then, funds will be channelled via the FROB (Spanish bank bailout and reconstruction fund) and thus appear on the sovereign’s books. Finally, Madrid was given until 2014 instead of 2013 to cut its deficit to below 3% of GDP (a proposal launched by the EC some time ago). In exchange, Spain must take additional austerity measures soon. Regarding Ireland, the Eurogroup will consider reviewing the funding of the bailout of the Irish banking sector conform the Spanish case (“Similar cases will be treated equally”). This means part of the bailout funds might be rechanneled off the sovereign’s books. Regarding Cyprus, a fullyfledged programme will normally be negotiated with the Cypriot authorities but a deal shouldn’t be expected before September. Finally, regarding Slovenia, FM’s were confident that the country can address its challenges and that it has no intention to seek aid.