BANK NOTE: Congress people from the Catalan Esquerra Republicana hold up signs which read, in Catalan, 'Bankia give back the savings', during a parliamentary session in Madrid yesterday .Picture: REUTERS

SPAIN yesterday won time to negotiate terms of European aid for its banks and gained approval for a state liquidity guarantee of ¤19bn for Bankia, the country's biggest problem lender.

Spain has been seeking a temporary mechanism to fund four nationalised banks that urgently need money, since it could take three to four months for a European aid package of up to ¤100bn to reach the country's financial system.

The European Commission (EC) said it gave Spain temporary approval to provide the guarantee for Bankia, which has asked for funds as soon as next month, as well as to convert existing state-owned preference shares in Bankia into equity. The approval is contingent on Spain presenting a restructuring plan for Bankia, which the state will soon fully control, within six months.

"There is no doubt that the beneficiary will need to undergo deep restructuring," European Union competition chief Joaquin Almunia, who regulates state aid, said in a statement.

It was not immediately clear where the guarantee funds would come from since Spain's bank rescue fund, the FROB, is down to about ¤5b n and the government does not want to go to markets to raise funds with its borrowing costs near euro lifetime highs.

As Spain's soaring borrowing costs sent it into a danger zone in recent weeks, Europe came to the rescue with the pledge of up to ¤100b n for banks that crumbled because of heavy exposure to a property bubble that burst in 2007-08.

Spain has formally requested the aid but has not said exactly how much of the package it will use. An independent audit said the banking system could need ¤62bn to weather a severe economic downturn, but a more detailed bank-by-bank audit is not due for several months.

Reuters