Spain given more time on deficit

Brussels - Euro zone ministers agreed early on Tuesday to grant Spain an extra year until 2014 to reach its deficit reduction targets in exchange for further budget savings and set the parameters of an aid package for Madrid's ailing banks.

The decisions were aimed at preventing the currency area's fourth largest economy, mired in a worsening recession, from needing a full state bailout which would stretch the limits of Europe's rescue fund and plunge it deeper into a debt crisis.

“The Eurogroup supports the recently adopted Commission recommendation to extend the deadline for the correction of the excessive deficit in Spain by one year to 2014,” ministers said in a statement.

No final figure was agreed for aid to ailing Spanish lenders, weighed down by bad debts due to a housing crash and recession, but the EU has set a maximum of 100-billion euros and some 30-billion euros would be available by the end of July if there was an urgent need.

A final loan agreement will be signed on or around July 20, Eurogroup chairperson Jean-Claude Juncker told a news conference.

In one key decision closely watched by investors, ministers agreed that once a single European banking supervisor is set up next year, Spanish banks could be directly recapitalised from the euro zone rescue fund without requiring a state guarantee.

That fulfils an EU summit mandate to try to break a so-called “doom loop” of mutual dependency between weak banks and over indebted sovereigns, but represented a climbdown for hardline north European creditor countries.

In a nine-hour marathon meeting ministers of the 17-nation euro zone also settled a series of long delayed appointments.

But they made no apparent progress on activating the bloc's rescue funds to intervene in bond markets to bring down the spiralling borrowing costs of Spain and Italy, which threaten to drive them out of the market.

The ministers reappointed Juncker as their chairman for a further term of up to 2-1/2 years, though Europe's longest-serving government leader said he intended to step down from the position at the end of this year or early in 2013.

They nominated another Luxembourger, inflation hawk Yves Mersch, to the vacant position on the European Central Bank's six-member executive board, and picked German Klaus Regling to head their permanent bailout fund, the European Stability Mechanism, due to come into force this month.

Regling had already set up and run the temporary European Financial Stability Facility which has funded rescues for Greece, Ireland and Portugal.

As ministers were meeting, a top ECB policymaker warned that Europe's debt crisis was now more acute than the 2008 financial turmoil that felled US investment bank Lehman Brothers.

“The euro zone crisis is now much more profound and more fundamental than at the time of Lehman,” ECB Executive Board member Peter Praet told a conference in Lisbon.

The Eurogroup ministers were tasked with fleshing out a bare-bones agreement reached by EU leaders at a summit last month on establishing a European banking supervisor and using the bloc's rescue funds to stabilise bond markets.

But differences persisted between north European countries such as Finland and the Netherlands and southern states led by Italy and Spain.

Earlier, ECB President Mario Draghi endured at times hostile questioning in the European Parliament, notably from German, Dutch and Finnish lawmakers concerned at the prospect of European bank bailouts using taxpayers' money.

A wider gathering of EU finance chiefs on Tuesday will formally ease a deficit reduction goal that has forced Madrid to make punishing cuts that are exacerbating a recession. - Reuters