(MoneyWatch) In a bid to head off a Spanish government default, European governments have agreed to jump-start a plan to bailout Spain's banks and promised to provide $37 billion by the end of the month.
Following another late-night emergency meeting, EU finance ministers said they would move the costs off the Spanish government's balance sheet in a move to protect Europe's fourth-largest economy from the debt crisis.
Investors showed a muted, but positive, initial reaction to the news. Spanish bond prices dropped slightly in the wake of the announcement. The country's 10-year bonds, which opened the day above the critical 7 percent level, were down in mid-day trading to 6.77 percent.
Spain's 5-year bonds dropped from an open of 6.46 to a mid-day level 5.96 percent. Still, the interest rate on Spain's short-term debt remains significantly higher than what Ireland, Greece, or Portugal were paying when they had to seek international bailouts shortly after the 2008 financial crisis.
Although the loans to Spain will initially go to the government's bank-restructuring agency, the plan is to convert them into direct cash injections after a European bank agency is set up to oversee the funding. European officials have not specified when the agency will launch, but that is expected sometime next year.
The $37 billion in funding is the first part of a $125 billion aid package approved last month by the EU for Spain's financial institutions. The ongoing collapse of housing prices caused by a real-estate bubble has left most of the nation's banks with debt far in excess of their assets. The exact amount of the bailout will probably not be known until September, when individual examinations of different Spanish banks have been completed.
Madrid has already twice delayed releasing a preliminary report on the banks' condition.
The deal must still be ratified by the parliaments of several EU member nations, including Germany, which has been unwilling to fund other nations' debts. If the agreement is to have a major impact, that approval must come very soon, experts say. Dutch Finance Minister Jan Kees de Jager said he hopes the agreement will be completed this week.