The Spanish risk premium surged to a record high of 600 basis points on Friday, upon the news that the region of Valencia applied for government aid. The Finnish and German parliaments' support for the Spanish bank bailout as well as the Eurogroup's final approval of the rescue for Spain failed to calm the markets.
Valencia asked for rescue funds as it is unable to pay off the 1.5 billion euro debt which comes due in the upcoming months. The funds would be allotted from a 18 billion euro liquidity fund, set up by the Spanish government last week.
After the news was released, the country's risk premium hit an all time high of 600 basis points and the yield on 10-year bonds reached 7.2%.
Eurogroup gives green light to Spanish bailout
On Friday EU finance ministers finally approved the EU rescue for distressed Spanish banks, after the German and Finnish parliaments backed their countries' participation in the bailout.
"We have formalised what we discussed in the past two Eurogroup meetings,” Luxemburg's Finance Minister Luc Frieden said after the conference call. “We have formally approved the memorandum that lays out the conditions under which Spain can be lent money for the recapitalisation of its banks."
Spain will receive a loan of up to 100 billion euros, but the exact amount will be decided upon in September, after the results of an exhaustive audit of the country's banking sector are released. The funds will be fully paid out by the end of 2013. As opposed to the international bailouts granted before to Greece, Ireland or Portugal this loan will have variable interest rates and a 15-year maturity.
Despite Eurogroup's positive decision, the yield on Spanish 10-year bonds remained above the 7% level.
Finland approves aid for Spanish banks
As expected, the Finnish parliament backed the rescue for Spanish banks in a vote held in the European morning on Friday. Earlier this week both countries reached an agreement on the amount of collateral Spain would offer to Finland in exchange for its participation in the EU bailout program.
The yield on Spanish 10-year bonds surged to 7.11% after the announcement and ahead of the Eurogroup's conference call during which the rescue is to be approved.
Hundreds of thousands of protesters marched on Thursday in various Spanish cities to express their opposition towards the harsh austerity measures introduced by Mariano Rajoy's conservative government.
Bundestag backs Spanish bailout
By 473 votes against 97, the German lower house has approved the €100 billion Spanish bank bailout on Thursday. Wolfgang Schäuble stated before voting that Spain needs the bailout to avoid the risk of linking state with banking debt.
Schäuble also said that "Spain is our partner" in the banking recapitalization process and that in term of deficit cuts, eurozone countries are "on a right path" as they have reduced deficit with a "great progress."
According to Schäuble, banking union is a "debate looking to the future."
Finland is debating the Spanish bailout today and it is expected to vote Friday. Spain and Finland reached a deal on €700 million as guarantee.