Finance ministers from the euro countries have unanimously approved the terms for a bailout loan for Spanish banks of up to 100 billion euro (£78bn).
The sign-off came yesterday 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.
The country’s economic woes deepened yet further, however, after a heavily indebted region asked the central government for help to pay creditors, prompting investors to dump Spanish stocks and government bonds.
Just as European ministers approved its banks bailout loan, the region of Valencia revealed it would become the first to tap a new fund designed to provide liquidity to the country’s 17 semi-autonomous regions.
Many Spanish regions are so heavily in debt due to the recession and a burst real estate bubble they cannot raise money at affordable rates. As a result, they are struggling to repay creditors and settle contract bills.
The yield on Spanish 10-year bonds, an indicator of investor confidence in a country’s ability to manage its debt, shot up 0.18 percentage points to 7.15 percent on the news, while the Ibex stock index fell 4.8 percent.
Valencia’s Vice President Jose Ciscar declined to say how much the eastern coastal region is asking for, while Treasury Minister Cristobal Montoro refused to call it a bailout.
The banking loan document, signed off by the “eurogroup” of finance ministers following a teleconference, 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 three per cent of gross domestic product by 2014.
The agreement, which will be signed in the next few days, calls for an initial disbursement of 30 billion euro (£23bn) 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.
Spanish banks are saddled with huge losses from property investments which have gone sour. The government cannot afford to rescue them itself.
Last week, the government passed painful austerity measures – tax rises and cuts to benefits, salaries and pensions – to reduce state debt and strengthen confidences in its finances.
The country’s royal family have also volunteered cuts of their own, reductions in salaries for King Juan Carlos and Crown Prince Felipe, while the budget for the family was cut alongside reductions in the expenses bill for Queen Sofia and Princess Letizia, Felipe’s wife.
Spaniards have been hit hard, with unemployment around 25 per cent, and massive protests were staged across the country on Thursday night.
Fifteen people were arrested and 39 people injured in central Madrid, police said, after tens of thousands of people took part in a protest against the government’s latest austerity package.
Police fired rubber bullets to disperse groups of protesters in streets in and around the Spanish parliament building.
The protesters set fire to rubbish bins and threw cans and other objects at police
A spokeswoman said 10 police officers were among the injured.
The demonstration in the capital was one of 80 held in cities across Spain to protest against the austerity measures the conservative government says are necessary if Spain wants to avoid a bailout like Greece, Ireland and Portugal.
This year the economy is expected to shrink 1.5 percent, a slight improvement from the 1.7 percent drop predicted before.