Civil servants hold up placards as they protest against government austerity measures in Madrid

REUTERS

Euro zone finance ministers approved the terms of a loan of up to 100 billion euros ($123 billion) for Spain to recapitalise its banks on Friday, but the exact size of the support will only be determined in September.

In a conference call, ministers signed off on a detailed memorandum of understanding with Spain spelling out the terms of the aid, which will be fully disbursed by the end of 2013, reports Reuters.

But before Spain can decide exactly how much money it needs, it must see the results of in-depth audits of its banking sector, which is riddled with bad property loans.

"Ministers unanimously agreed today to grant financial assistance for the recapitalisation of financial institutions in response to the Spanish authorities' request," the Eurogroup of euro zone finance ministers said in a statement.

"The specific amount will be determined based on a thorough bottom-up assessment of capital needs for individual banks, which has been launched and is expected to be finalised in September."

The bank rescue, and fresh austerity measures and looser fiscal targets agreed with Madrid, are aimed at avoiding a full sovereign bailout that the euro zone could barely afford.

In return for the loan, Spain will have to restructure its banking sector and its assets, and improve governance and regulation, the Eurogroup statement said.

But Madrid will also have to honour its government deficit reduction targets and commitments on structural reforms and rebalancing of its economy, undertaken under separate procedures of the European Union. That will prove tough, particularly with the country's powerful regions unable or unwilling to rein in their own spending to cut their debts.

"Progress in these areas will be closely and regularly reviewed in parallel with the financial sector conditionality," the ministers added.

EU Economic and Monetary Affairs Commissioner Olli Rehn stressed Spain was expected to bring its budget deficit below 3 percent of GDP in a sustainable manner by 2014 and to adopt structural reforms prescribed by the European Commission.

"The explicit link between these obligations and the sectoral programme is deliberate and pertinent," Rehn said.

Speaking after the ministers' call, Luxembourg's Finance Minister Luc Frieden said: "Money will not flow immediately, because work on the analysis of the specific banks is ongoing."

Under the bailout memorandum, 14 banking groups that make up about 90 percent of Spain's banking system will be tested for their recapitalisation needs.

Madrid expects 30 billion euros in a first tranche of money that will be available immediately for state-rescued banks that urgently need funds.

An independent audit from consultancy firms Oliver Wyman and Roland Berger, published on June 21, showed the banking sector needed up to 62 billion euros in total.

But a second, more detailed audit, as well as new stress tests, will help determine precisely how much each bank needs and in what form - loans or cash.

Spain's three biggest banks - Banco Santander, BBVA and Caixabank - would not need extra capital even in a stressed scenario, the independent audit said.