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EC 37bn Euro check for Spanish banks but 50% of branches must go and hair cut for bond holders

EU Competition Commissioner Joaquin Almunia promised a second chapter of announcements on 20 December

The European Commission gave on Wednesday the go ahead for Spain to overhaul its stricken nationalized banks and opened the door for nearly 40 billion Euros in Euro zone aid to be disbursed, offering hope for an end to Spain's banking crisis.

Lenders Bankia, NCG Banco, Catalunya Banc and Banco de Valencia will need 37 billion Euros to be recapitalized and the banks' bondholders will face losses, EU Competition Commissioner Joaquin Almunia said.

The approval allows the Euro zone to disburse the funds from its permanent ESM bailout fund and could mark a turning point in a banking crisis that has dragged Spain into recession after its real estate bubble burst. Spain was given approval to receive up to 100 billion Euros from the ESM in June.

The announcement sets down one of the most far-reaching restructuring plans of any European banking system ordered by the EC since the start of a banking crisis in mid-2007 with the near collapse of German lender IKB.

“The approval of the restructuring plans of BFA/Bankia, NCG, Catalunya Banc and Banco de Valencia is a milestone in the implementation of the Memorandum of Understanding between Euro area countries and Spain,” EU Competition Commissioner Joaquin Almunia said, referring to Spain's Euro zone bank bailout.

“What we've approved today means that the funds for the European Stability Mechanism can be disbursed,” Almunia told a news conference. “The total amount adopted today is 37 billion Euros.”

The EC said Banco de Valencia would be sold and integrated into Caixabank, and the other three banks would need to cut their balance sheets by more than 60% over the next five years.

In what potentially signals thousands of job losses in Spain, Almunia said the nationalized banks would have to close up to half their branches during a five-year overhaul process.

There will be a pay cap and a coupon payment and acquisition bans on the banks during their restructuring period. The cost to hybrid and subordinated bondholders will come to about 10 billion Euros, Almunia said. He anticipated a decision on other Spanish banks on December 20.

In related news in neighbouring France the number of people out of work soared again in October to hit its highest level in 14-and-a-half years, piling pressure on Socialist President Francois Hollande who has promised to halt the relentless rise by the end of 2013.

Labour Ministry data showed the number of jobseekers in mainland France rose by 45,400, or 1.5%, to hit 3.103 million, marking the 18th consecutive monthly increase and taking the total to its highest level since April 1998.

The increase was only slightly smaller than in September which saw the biggest jump in jobless rolls since April 2009, showing the deterioration in the job market is accelerating as recession in the broader euro zone hits demand.

France's 1.9 trillion Euro economy has been virtually stagnant since grinding to a halt at the end of last year, and many economists expect it to contract in the months ahead despite a surprise 0.2% rise in the third quarter.

With the economy still struggling, the Labour Ministry said there was a risk the figures could get even worse. But he also noted that new measures to bolster company investment and the youth job market that will kick in from next year have yet to produce results.

The Labour Ministry data is the most frequently reported domestic jobs indicator for France, although it is not prepared according to widely used International Labour Organisation (ILO) standards nor expressed as a rate of the number of job seekers compared with the total work force.