October 1, 2012 / 12:29 PM / in 5 years

EU's Rehn: aid for Spain banks won't hurt budget goal

MADRID (Reuters) - The 40 billion euros ($51 billion) in European aid that Spain plans to take for its ailing banks should start flowing in November and will not push up the country’s structural deficit, EU Commissioner Olli Rehn said on Monday.

E.U. Economic and Monetary Affairs Commissioner Olli Rehn arrives to meet with Spanish Prime Minister Mariano Rajoy (unseen) at Madrid's Moncloa Palace October 1, 2012. REUTERS/Susana Vera

Spain has been struggling to hold down its borrowing costs as the euro zone’s sovereign debt crisis intensifies. It has agreed with the European Union to bring its deficit down to 6.3 percent of gross domestic product this year.

Rehn, who met Spanish Prime Minister Mariano Rajoy and Economy Minister Luis de Guindos in Madrid, said the European Commission recognizes that aid for the banks is a one-off event that should not go against the country’s drive to cut spending.

Rajoy has been inching towards applying for a government bailout for Spain but has shown reluctance to do so swiftly despite the intensifying threat of a market attack on Spain.

De Guindos said the government has calculated that the deficit will jump to 7.4 percent of GDP this year when taking into account the aid for banks.

In June, euro area leaders agreed that Spanish banks would eventually get direct recapitalization -- under a new European aid fund that is being set up -- and the banking debts currently accrued to the Spanish central government account would be shifted off the books.

In a letter last week, the Netherlands, Germany and Finland said the direct bank recapitalization would only work for banks that get in trouble in the future, not for those that are being rescued under the current program for Spain, raising alarm in Spain and among investors.

Rehn said that regardless of the statement from the three countries, in the end it is up to the 17 euro area states to decide how bank recapitalization is treated and said he understood they “will respect commitments from the euro area summit in June.”

Rehn said Spain’s deficit target for this year is within reach.

Writing by Fiona Ortiz; Editing by Ruth Pitchford

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