The European Union worked towards stabilising Spain's finances Tuesday as it backed up the blueprint for the country's €100 billion bank-bailout plan with plans to grant the country an extra year to cut its budget deficit.
Finance ministers from the 27 EU countries, meeting in Brussels, approved extending Spain's deadline for achieving a budget deficit of less than three per cent of its annual economic output, until 2014, said Vassos Shiarly, Cyprus' finance minister and chair of the meeting.
The size of Spain's economy in 2011 is estimated to have been US$1.5 trillion.
The move comes on the heels of an overnight meeting at which the 17 euro area finance ministers agreed on the terms of a bailout for Spain's troubled banks, saying that the first €30 billion (US$36.88 billion) in aid can be ready by the end of this month.
Unemployment in Spain is nearing 25 per cent.
Last month, the Eurozone's finance ministers agreed to offer Spain up to €100 billion to prop up its stricken banking sector, which has been weakened by toxic loans and assets from a collapsed property market.
The finance ministers for the 17 countries that use the euro will return to Brussels on July 20 to finalise the agreement, having first obtained the approval of their governments or parliaments, Eurozone chief Jean-Claude Juncker said.
Spanish Finance Minister Luis de Guindos said the bank-bailout money - however much is ultimately deemed to be necessary - would be disbursed over 18 months.
"As far as cleaning up the Spanish financial sector is concerned, this is going to create profound, important possibilities," he said. "We have to take full advantage of this over the next 18 months."
De Guindos said that only one country - Finland - asked for collateral. "We are working with them on this," he said.
Spain's new budget targets are to have a deficit of 6.3 per cent this year, falling safely under the three per cent ceiling to 2.8 per cent in 2014, said EU Economic and Monetary Affairs Commissioner Olli Rehn.
Investors - who had been concerned about the terms of Spain's bailout - tentatively welcomed news of the ministers' decisions.
Markets across Europe showed slight gains Tuesday afternoon. In Madrid, the country's main IBEX index rose 0.83 per cent to 6,742.20 while the borrowing cost of its 10-year bond dropped from 7.03 per cent Monday to 6.75 per cent.
Juncker added that the Spanish deal will mean that each bank that receives a bailout will be forced to adopt specific conditions, and the supervision of the financial sector overall will be strengthened.
Dutch Finance Minister Jan Kees de Jager said the agreement should be finalised soon. "We hope this can be wrapped up within a week," he said.
Exact amount unknown
The exact amount of the bailout will likely not be known until September, when individual examinations of different Spanish banks have been completed.
Spain - the fourth-largest economy in the Eurozone - has been struggling to keep a lid on its government deficit in the midst of a recession while trying to support its troubled banking industry.
There are fears that should Spain need a bailout of its own, the Eurozone would struggle to finance it, pushing the region further into recession.
De Jager said Madrid's partners agree that "financial sector reforms in Spain must be ruthlessly implemented". However, he said a system of EU-wide banking supervision still needed to be worked out.
But on Monday, before the eurogroup meeting began, Mario Draghi, the chief of the European Central Bank, said he was confident that a banking union in the European Union would be achieved.
"We are talking about the long-term sustainability of the European monetary union. We are going as fast as we can. It is better to do things right than in a hurried fashion," Draghi told a committee of the European Parliament.
Rehn said the European Commission would put forward legislative proposals for the creation of a "Single Supervisory Mechanism" for banks in the euro area, involving the European Central Bank, in early September.
The creation of the central-bank supervision will allow the EU's firewall fund to recapitalise banks directly rather than lending the money to a country's government - something that increases the country's debt load.