Eurozone OKs terms of bailout for Spanish banks

BRUSSELS (AP) -- Finance ministers from the 17 countries that use the euro unanimously approved Friday the terms for a bailout loan for Spanish banks of up to €100 billion ($122.9 billion).

The agreement came as investor concerns on the stability of Spain's economy, and that the government itself might need rescuing, sent the country's borrowing costs soaring and its stock prices plummeting. In early afternoon trading, Spain's main IBEX index was down 4.6 per cent while the interest rate on the country's 10-year bond — an indicator of investor confidence in a country's ability to manage its debt — was at 7.2 percent.

The document, signed off by the "eurogroup" of finance ministers following a teleconference Friday, calls for strict monitoring of the banks that receive aid. It also requires the Spanish government to present this month plans to reduce its budget deficit to under 3 percent of gross domestic product by 2014.

"The eurogroup is convinced that the reforms attached to this financial agreement will contribute to ensuring a return of all parts of the Spanish banking sector to soundness and stability," the finance ministers said in a statement.

The agreement, which will be signed in the next few days, calls for an initial disbursement of €30 billion ($36.9 billion) this month. The full amount of money needed to shore up Spain's banks will not be known until September, after individual banks have been assessed.

"The aim of this program is very clear: to provide Spain with healthy, effectively regulated and rigorously supervised banks, capable of nurturing sustainable economic growth," Olli Rehn, the European monetary affairs commissioner said in a statement.

Christine Lagarde, the head of the International Monetary Fund, also welcomed the agreement.

"The implementation of these measures will contribute to significantly strengthen Spain's financial system, an essential step in restoring growth and prosperity in the country," she said in a statement.

Spanish banks are saddled with huge losses from soured real estate investments. The government cannot afford to rescue them itself, raising fears it may need a bailout of its own.

The government last week passed painful austerity measures — tax hikes and cuts to benefits, salaries and pensions — to reduce state debt and strengthen confidences in its finances.

Spaniards have been hit hard, with unemployment around 25 percent, and staged massive protests across the country on Thursday night.

Police say 15 people were arrested and 39 people injured overnight in central Madrid after tens of thousands of people took part in a demonstration to protest the conservative government's latest austerity package.

The demonstration Thursday evening in Madrid was one of 80 held in cities across Spain to protest the austerity measures the government says are necessary if Spain wants to avoid a bailout like Greece, Ireland and Portugal.

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Giles reported from Madrid.