Euro zone starts giving shape to Spanish bank aid

LUXEMBOURG: The euro zone started tackling conditions yesterday for financial aid to Spain's banks, while arguing over a revision sought by Greece's new government of its bailout.
Euro zone finance ministers opened talks in Luxembourg, with International Monetary Fund Managing Director Christine Lagarde also attending and a further request for help also anticipated soon from Cyprus.
Spanish Finance Minister Luis De Guindos said his country would officially request aid for its stricken banks "in the coming days."
"It's a mere formality," De Guindos said on arrival for the meeting. "Today we are here to explain the situation with the Spanish banking sector."
The Spanish government was due to release two audits of the banks, one from the German firm Roland Berger, the other from the US firm Oliver Wyman, upon which the size of the banking rescue will depend.
The head of the Euro Working Group that prepares euro zone meetings, Thomas Wieser, told AFP in an interview that the banking aid would likely be "well within" a euro zone offer of up to 100 billion euros ($127 billion).
In the meantime, and with an eye particularly on Spain and Italy, a financial sector source told AFP on Thursday that the European Central Bank is set to loosen the criteria on collateral it requires from commercial banks in exchange for central bank funds.
The decision is expected to be announced today, the source added.
The pressure intensified against Spain on Thursday as the interest demanded by investors soared in a new bond sale, leaping to 4.706 percent for two-year bonds, more than double the rate charged in a March sale.
But Madrid showed it can still tap the market at a pivotal time, with the Treasury raising 2.22 billion euros despite fears mounting that a state bailout could follow the bank recapitalization.
Thursday's talks, which will widen Friday to include the finance ministers of Britain and other non-euro states in another tough fight over calls to introduce a tax on financial transactions, are part of a marathon series leading up to a full European Union summit next week.
The talks come on the eve of a mini-summit of the leaders of the euro zone's big four — Germany, France, Italy and Spain — in Rome, where they are expected to elaborate a plan for the euro zone rescue funds to intervene more easily on bond markets.
Berlin has declared itself skeptical.
By Thursday and Friday next week, the euro zone is expected to have agreed the short- and long-term shape of a banking or financial union and steps towards closer political integration that economists see as essential to getting to the root of the debt crisis.
The United States, the IMF and the European Central Bank have all urged greater banking integration in Europe, as the debt crisis boomerangs from financial sectors to sovereigns.
The ministers were also facing a demand from the newly-announced Greek government line-up to change the terms of its EU-IMF rescue.
A joint statement by the conservative, socialist and moderate leftist parties that form the ruling coalition said the government aimed "to revise terms of the loan agreement without endangering the country's European course and its place in the euro."
But hardliners — led by Germany and the Netherlands — immediately signaled opposition.
Asked whether Greece could be given more time to honor its commitments, Finland's Finance Minister Jutta Urpilainen said: "I don't think it's a good idea."
The Eurogroup faces a stark choice, warned Wieser of the Euro Working Group.
Either you "stick to the fiscal targets and then you need additional measures" from Greece, he said, or you change deadlines, in which case "you need extra money."
Wieser said a deal worth 130 billion euros in new loans agreed in March was no longer workable, warning that by August, the euro zone and the IMF will have to "seriously re-negotiate how to get the thing back on track."
Cyprus will probably seek euro zone aid for its ailing banks next week, after securing a separate bilateral loan from Russia, an EU diplomat said Wednesday.