October 1, 2012 / 12:26 PM / 5 years ago

EU's Rehn: aid for Spain banks won't hurt budget goal

5 Min Read

MADRID (Reuters) - The 40 billion euros ($51 billion) in European aid that Spain plans to take for its ailing banks should start flowing in November and will not push up the country's structural deficit, EU Commissioner Olli Rehn said on Monday.

Spain has been struggling to hold down its borrowing costs as the euro zone's sovereign debt crisis intensifies and has agreed with the European Union to bring its deficit down to 6.3 percent of gross domestic product this year.

The government said on Saturday the 2012 deficit would be 7.4 percent of GDP when considering help granted its banks, forced to conduct strict recapitalization programs as bad loans from bust housing bubble hit bottom lines.

"It can be expected that this kind of element of increase in the fiscal deficit related to bank capitalization will be treated as a one-off and will not affect the structural deficit," Rehn told a news conference in Madrid after meeting Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos.

However, the full effect on the deficit would need to be calculated by the European statistics agency Eurostat, he added.

Next year's debt-to-GDP ratio would jump to 90.5 percent from 85.3 percent this year, mostly due to the debt load taken on by the government to pour funds in to some of its more troubled lenders.

In June, euro area leaders agreed that Spanish banks would eventually get direct recapitalization, and aid from Europe would be shifted off the Spanish central government books.

In a letter last week, the Netherlands, Germany and Finland said the direct bank recapitalization would work only for banks that get in trouble in the future, not for those that are being rescued under the current program for Spain. This caused alarm in Spain and among investors.

Rehn said that, regardless of the statement from the three countries, it was up to the 17 euro area states to decide how bank recapitalization is treated and added that he understood they "will respect commitments from the euro area summit in June."

A stress test by consulting firm Oliver Wyman put the extra capital needs of 14 Spanish banks tested at 59.3 billion euros, below the 100 billion euro credit line Spain agreed with the euro zone in July to clean up the sector.

E.U. Economic and Monetary Affairs Commissioner Olli Rehn arrives to meet with Spanish Prime Minister Mariano Rajoy (unseen) at Madrid's Moncloa Palace October 1, 2012.Susana Vera

The Bank of Spain said it won't need the full credit line to raise the necessary capital. Banco Popular POP.MC said on Monday it would not apply for state aid and announced a share issue of up to 2.5 billion euros.

Aid Conditions

Spain has been inching towards applying for a government bailout, which would trigger a European Central Bank bond-buying program, but Rajoy has said he is studying possible conditions.

Uncertainty over whether Spain would apply for aid has kept premiums on sovereign debt at levels considered unsustainable over the long term. The yield on Spain's 10-year benchmark bond stood at around 5.9 percent on Monday.

Rehn said on Monday the conditions of any aid program were well known by all euro zone governments.

"Conditions would be based on country-specific recommendations that were decided for all 27 EU member states in July and there would be a clear set of policy priorities and clear timelines on the basis of these country-specific recommendations," he said.

The Spanish government said it would announce 43 structural reforms over the next six months and Brussels said the detailed timetable goes beyond what the Commission has asked of Spain and is an ambitious step forward.

The EU commissioner said on Monday he was fully confident Spain would take the necessary steps to restore the economy to health and added it must continue reforming its pension system, linking retirement age to life expectancy.

Rajoy has said the pension budget was the last thing he would cut as he introduces sweeping cuts through the social security system, though he has said he would introduce a new law on pensions before the end of the year.

The Commission would give its analysis of Spain's budget proposal November 7, Rehn said.

Spain would not take a decision on aid until it had studied the conditions and the effects of a request on the Spanish economy and the euro zone as a whole, de Guindos said. ($1 = 0.7773 euros)

Editing by Fiona Ortiz and Stephen Nisbet

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