UPDATE 1-Spain, EU agree framework for 'bad bank'

Wed Aug 29, 2012 7:55am EDT

* Spanish cabinet to approve bad bank Friday - minister

* Creation of entity will trigger release of bank aid

* Says not negotiating more austerity measures with EU

MADRID, Aug 29 (Reuters) - Spanish and European Union officials have agreed on the framework for a 'bad bank' to take on the toxic assets plaguing the country's financial sector, its economy minister said, paving the way for the release of European aid.

Spain must set up the new vehicle to cleanse the sector of soured loans and repossessed real estate that have built up since a decade-long property bubble burst four years ago.

The government will approve its regulatory framework on Friday, minister Luis de Guindos told reporters.

Establishing the bad bank is one of the conditions attached to up to 100 billion euros ($126 billion) in European aid for the financial sector that Spain was granted in June.

A technical mission from the European Commission, the ECB and the International Monetary Fund met officials from the Bank of Spain and the economy ministry in Madrid last Friday to discuss the bad bank's creation.

"There has not been any disagreement with Brussels," de Guindos said.

The government is also set on Friday to grant its central bank new powers to intervene more rapidly in struggling lenders, and the country's bank rescue fund (FROB) will gain more capacity to wind them down if they fail, according to the draft for a new law obtained by Reuters..

De Guindos reiterated that Spain has not yet formally decided whether to request a wider EU bailout that would contribute to reducing the country's high borrowing costs.

In this regard, he said Spain is not currently negotiating any further austerity measures in exchange for the potential use of the European rescue fund to purchase government debt.

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