Eurozone finance ministers agreed on Tuesday to give Spain an extra year to meet its deficit reduction targets in exchange for further spending cuts while also setting the parameters of an aid package for Madrid's ailing banks.
Eurogroup chief Jean-Claude Juncker said that the eurozone's finance ministers have agreed to provide Spain €30bn (US$36.90bn) by the end of the month. No final figure was agreed for the Spanish aid but the EU has set a maximum limit of €100bn.
A final loan agreement will be signed on or around July 20, Juncker told a news conference after a nine-hour meeting in Brussels.
Separately, the Eurozone finance ministers agreed that once a single European banking supervisor is set up next year, Spanish banks could be directly recapitalised from the region's rescue fund without requiring a state guarantee. Spain will create a single bad bank to house toxic assets from its banking sector.
The European Commission also decided to extend the deadline for the correction of the excessive deficit in Spain by one year, to 2014.
Spain’s new deficit target for 2012 should be 6.3% of GDP, compared with a prior target of 5.3% of GDP. The 2013 deficit target would be 4.5% of GDP, and the 2014 goal would be 2.8%. Spain was originally meant to cut its budget shortfall to 4.4% of GDP this year.
Spanish Prime Minister Mariano Rajoy unilaterally changed the target to 5.8% of GDP in March before eventually settling for 5.3% of GDP.
European Economic and Monetary Affairs Commissioner Olli Rehn said today that Spain was expected to take additional savings measures very soon to ensure it meets its new budget deficit targets.
The Eurogroup said in a statement that it welcomed the European Commission’s intention to present proposals in early September aimed at introducing the new financial supervisory mechanism.
“We expect the European Council to consider these proposals as a matter of urgency by the end of 2012,” the Eurogroup said.
However, the eurozone leaders failed to make decisive progress on activating the common currency bloc's rescue funds to intervene in bond markets to bring down the spiralling borrowing costs of Spain and Italy.
The European Stability Mechanism (ESM) is due to replace the current bailout fund, the European Financial Stability Facility (EFSF) later this month.
Spanish and Italian borrowing costs continued to rise on Monday, with Spain's 10-year bond topping the critical 7% level.
Spanish Economy Minister Luis de Guindos spelled out his government's plan for a package of up to €30bn over several years through spending cuts and tax increases that are due to be announced on Wednesday.
Reports said that €10bn of spending cuts would come this year and that the measures would include a hike in VAT sales tax, reduced social security payments, reduced unemployment benefits and changes to pensions calculations.
Meanwhile, Eurogroup chief Juncker confirmed media reports that he had received a mandate for another term as Eurogroup head but added that he would decline to stay on past the current year, or early in 2013.
Eurogroup also nominated Luxembourg's Yves Mersch to the vacant position on the European Central Bank's (ECB) six-member executive board, and picked German Klaus Regling to head their permanent bailout fund, the ESM.
Regling had set up and run the temporary EFSF which has funded rescues for Greece, Ireland and Portugal.
The eurozone finance ministers also had a first discussion with new Greek Finance Minister Yannis Stournaras but made no decision on any change in Athens' austerity programme, which has been put in abeyance following June 17 elections.
Juncker said that arrangements would be made to ensure a Greek debt repayment due in August did not send the debt-stricken country into bankruptcy. "We will find solutions for August. There's no reason to worry about August," he said.
ECB President Draghi told EU lawmakers that the key to restoring market confidence was for the debt-plagued eurozone countries to fully implement promised structural reforms and stick to programmes agreed with Brussels and international lenders, even if they caused social tensions.
Draghi left the door open for a further cut in interest rates after last week's 25 basis point cut to 0.75%.