BRUSSELS – Spanish Prime Minister Mariano Rajoy expressed satisfaction Friday with the outcome of a European Union summit – in which leaders agreed to use the region’s permanent rescue fund to bail out ailing banks directly – although he cautioned that the bloc still has a long road ahead to overcome its sovereign-debt crisis.
Rajoy hailed the agreement on direct bank recapitalization, a decision prompted by pressure from Spain and Italy, which had refused to cooperate on a growth pact and other agreements until steps were taken to ease their borrowing costs.
The premier said the deal was necessary to ensure that European financial assistance does not add to individual countries’ public debt burdens.
Rajoy arrived in Brussels Thursday calling for action from the 17-member euro zone to help bring down interest rates on Spain’s bonds.
Borrowing costs have spiraled this year due in part to investors’ concerns that the government would be on the hook for a recently approved European loan of up to 100 billion euros ($126.6 billion) to bail out Spain’s bad loan-saddled banks.
Rajoy had warned in recent days that Spain could not continue financing itself for much longer at the rates it was being forced to pay at bond auctions, and said further regional action and integration was needed to guarantee financial stability and defend the euro.
After the summit ended and the direct bank recapitalization plan was announced, the price of Spain’s benchmark 10-year bond surged and the yield fell around 60 basis points, the most in 10 months.
Rajoy sounded a note of optimism after the gathering, saying Europe had spoken “loudly and clearly” in favor of preserving the single currency, although he cautioned that there was still a “long road ahead” to resolving the sovereign-debt crisis.
The premier said that for the time being he was not considering requesting that European rescue funds be used to purchase Spanish bonds and bring down rates, even after the bloc’s leaders vowed to allow greater flexibility in the use of those funds.
“We’re not planning anything in that regard,” Rajoy said, echoing remarks by Italy, which is also struggling to cope with a spike in interest rates on its bonds in recent months.
Rajoy also stressed the importance of an agreement stating that the euro-zone permanent rescue fund that will extend a lifeline of up to 100 billion euros to Spanish banks will not be regarded as a preferred creditor.
Analysts said that decision was needed to allay concerns of private holders of the debt of Spain’s banks that they would suffer heavy losses in the event of a default.
Referring to the loan, which euro-zone finance ministers approved earlier this month and Spain formally requested on Monday, Rajoy said struggling Spanish banks will receive direct aid from the permanent rescue fund – the European Stability Mechanism, due to take effect in July – once a joint banking supervising body for euro-zone members has been set up.
He added that that should occur before year’s end.
For the time being, Spanish lenders in need of assistance will b
e recapitalized by the euro zone’s temporary rescue fund, with the funds channeled through the Spanish government. But the loans will come off the government’s balance sheet once direct bank recapitalization kicks in.
All of the major decisions at the summit – direct bank recapitalization, more flexible use of euro-zone rescue funds and lack of preferred creditor status for the ESM – were perceived Friday by the media as victories for Spain and Italy and as concessions made by the northern European countries, headed by Germany.
But Rajoy avoided any hint of triumphalism and denied that the results were obtained through pressure, instead praising his European partners for confronting the region’s challenges with bold steps.
Spain’s central bank said Wednesday the country’s economy – already in recession for the second time in three years – continued to weaken in the second quarter, contracting at a faster-than-expected clip due to a decline in demand.
The Iberian nation’s economy has been battered in recent years by the global recession and the collapse of a massive real-estate bubble, which has left banks saddled with toxic property assets.
The overall unemployment rate stands at almost 25 percent and nearly half of Spaniards under 25 are jobless, while tens of thousands of families have been evicted from their homes after falling behind on their mortgages.
The government says it will take new steps soon to bolster growth, but it must balance that aim with its commitments to bringing its budget deficit down to within EU-mandated limits. EFE