There is a feeling of relief in Brussels. The reason is Spain's formal request for rescue loans for its ailing banking sector submitted on Monday morning.
"I am confident that we can conclude an agreement on the memorandum of understanding in a matter of weeks, so that we can proceed with the restructuring effort," European Economic Affairs Commissioner Olli Rehn said in a statement.
Last week experts estimated that Spanish banks need between €52 to 62 billion ($65- 77 billion). Rehn called this "a good starting point" for the investigation that will now be conducted by his experts.
The Spanish government's request means it has caved in to pressure from Europe. Prime Minister Mariano Rajoy had sought to delay the application but euro-bloc nations piled on the pressure, hoping that an official call for help would signal to investors that Spain is taking its banking problems seriously. That could make it easier for the financially troubled country to obtain fresh capital from financial markets.
But a number of questions remain:
• How much money will Spain actually get to stabilize its ailing banks?
• Will the funds come from the temporary bailout fund (the European Financial Stability Facility, EFSF) or from the new, permanent European Stability Mechanism (ESM) which is scheduled to start up in July?
• And finally, what conditions will Rajoy's government and the Spanish banks have to fulfil in order to access the rescue funds?
How Much Money is Needed?
The exact amount that Spain has requested in its application is still unknown. Experts predict that the total surpasses €62 billion calculated by Oliver Wyman consultants as a maximum capital requirement. The reason is clear: the financial aid needs to be enough to cover the worst case scenario of unforeseen risks cropping up in the banks' balance sheets.
Spain's request says that the total will be "sufficient to meet the capital needs and provide an additional margin as collateral - up to a maximum of €100 billion." This amount had been flagged to Spain by the group of euro countries two weeks earlier.
According to EU Commissioner Rehn, the roadmap will now be as follows: Within a few weeks the Spanish government and its European partners will agree on conditions for the multi-billion rescue fund. If all goes smoothly, the plan will be sealed on July 9. Then the euro zone finance ministers will meet again in Brussels to decide on terms and conditions attached. The final decision on when the rescue fund will be released will fall to the Eurogroup.
Where Will Money Come From?
The current signs suggest that the money will initially come from the EFSF and that ESM will later assume responsibility for the program. Many experts have said they believe it would be preferable for the bank aid to be financed through the permanent ESM fund because that would ensure that the country could remain a lender for other countries that succumb to the crisis. The problem with the EFSF is that it includes provisions that enable countries that accept the aid to be freed of their role as guarantor. In fact, all three countries that have so far accepted aid from the fund have taken precisely this step, including Ireland, Portugal and Greece. If Spain, the euro zone's fourth-largest economy were to do likewise, it would represent a dramatic setback for efforts to save the euro.
The ESM is supposed to start its work in July, but it remains questionable whether all the euro-zone countries will succeed in ratifying it by them. Ratification is likely to be subject to delay in Germany, as well. Last week, President Joachim Gauck announced that he wouldn't initially sign the ESM into law in Berlin. He was responding to a request from Germany's highest judicial authority, the Federal Constitution Court, which said it needs more time to review possible lawsuits against the EU's permanent bailout mechanism. Rehn's spokesman noted on Monday that the fund can only take effect once it has accumulated 90 percent of its capital -- that is, once it has been ratified by eight countries with the largest shares of ESM capital. Germany, with its share of about 27 percent, is the largest donor, and nothing can happen without it. If this capital were not available by the time the aid had to be paid out to Spain, then the funding would initially have to be pulled from the EFSF.
What Conditions Will Be Applied to Spanish Bank Aid?
But the conditions to be set for the Spanish government would be different from those applied to previous aid packages given to Greece, Portugal and Ireland because they would focus on the financial sector instead of the government budget. It would require that all banks that received aid adhere to special conditions -- particularly on the issues of equity ratios and extension of credit. It is also possible that mergers of crisis-plagued institutions would be imaginable as well as the closing of banks in some extreme cases. But Spain would also be required to reform the way in which it supervises and regulates its banks -- a condition that would apply to the entire industry.
Oversight of whether those conditions are being adhered to would be up to the European Central Bank (ECB), the European Banking Authority and the European Commission. In contrast to previous aid programs for Greece and Portugal, the International Monetary Fund would only serve an advisory function in the Spanish bank bailout.
It would also require action by Germany's federal parliament, the Bundestag, because under recent rulings by the constitutional court, the German government is only permitted to give its blessing to EFSF bailout aid if it has been approved by parliament. Without that corresponding vote, the German representative at the EFSF is required to reject any aid. Given that decisions on the EFSF board of directors must be unanimous, the German parliament has an effective veto power. And it is still an open question when the Bundestag will consider the request for bank aid for Spain. What is certain, though, is that parliament will likely need to be called back from its summer recess, which begins next week, for any such vote.