Spain formally files for European bailout; details are a mystery

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MADRID -- Spain filed its formal request Monday for a European bailout, but postponed announcing an exact dollar figure and many other details until after what could be a contentious summit of the continent’s leaders later this week.

European Union leaders open a two-day summit Thursday in Brussels to discuss the continent’s spiraling debt crisis, and how to lower borrowing costs for Italy and Spain -- Europe’s third- and fourth-largest economies respectively -- which many fear are too big to fail, yet too expensive to bail out.

In a letter Monday to Eurogroup president Jean-Claude Juncker, Economy Minister Luis de Guindos said Spain would ask Europe for enough money to shore up Spanish banks, plus additional funds to provide an extra margin. He wrote that the money would first go into Spain’s bank recapitalization fund, and then be distributed to needy banks. Spanish banks are drowning in unpaid property loans left over from the housing bubble, and threaten to topple Spain’s economy without outside intervention. Spain’s European partners have offered as much as $125 billion to shore up Spain’s banking sector.

De Guindos’ letter alludes to “different possibilities” under consideration in the “choice of a concrete instrument” to handle the loan. That language could leave open the door for Europe to lend directly to Spanish banks, bypassing the Spanish government and thus avoiding any impact on Spain’s overall debt load.

In the two weeks since Madrid first indicated it would need aid for its banks, the Spanish government’s borrowing costs have spiked past levels that prompted previous bailouts for Greece, Portugal and Ireland. That’s because a European Union loan for Spanish banks would add to the Spanish government’s obligations. A recent poll shows only 10% of Spaniards believe their government would be able to pay back that loan, with interest.

De Guindos is pushing instead for direct European recapitalization of his country’s banks. But Germany doesn’t want its contributions to European rescue funds to go straight into Spanish banks, which have a history of mismanagement and corruption. Rather, German Chancellor Angela Merkel wants the Spanish government on the hook for repayment.

Full details of Spain’s bailout are due to be ironed out before July 9, when De Guindos said he would sign a document outlining the loan’s conditions at a meeting of Eurozone finance ministers.

Spanish stocks plunged more than 3% Monday, after word that De Guindos’ bailout request contained few details to reassure investors.

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-- Lauren Frayer