By Nick Mann | 10 July 2012

Eurozone finance ministers have approved a proposal to give Spain an extra year to reduce its budget deficit below 3%, as well as agreeing the terms of a bailout for the country’s ailing banks.

Meeting in Brussels, the eurogroup of ministers backed European Commission proposals to give Spain until 2014 to reduce its budget deficit below the 3% of gross domestic product limit set under the European Union Stability and Growth Pact.

The extended deadline, which is now set to be approved by finance ministers from all 27 EU member states later today, means that Spain’s deficit targets will be 6.3% for 2012, 4.5% for 2013 and 2.8% for 2014.

Olli Rehn, vice president of the commission, said that under the terms of the extension, Spain would be expected to implement measures outlined in its budget last month, as well as adopting a budget plan setting out exactly how it plans to meet the new 2014 deadline.

It will also involve ‘rapid adoption’ of additional measures to ensure the 2012 fiscal target is met.

‘This is a challenging but achievable objective,’ said Rehn. ‘Above all, it is a necessary objective. It is essential that the multiple challenges Spain is facing – the repair of its banking sector, structural reforms to boost growth and jobs and tackle imbalances, and action to restore sustainability to its public finances – are addressed with equally strong determination.’

Last night’s meeting also saw ministers reach a ‘political understanding’ on the memorandum of understanding that will underpin the recapitalisation of Spain’s ailing banks.

The details of the bailout, which is expected to total up to €100bn, must now be endorsed by each eurozone member domestically before the eurogroup provides final approval for the programme on July 20. Spain could then receive €30bn of bailout funds by the end of the month.

Ministers also confirmed that discussions would start in September on how to directly bailout banks with European funds, instead of channelling any support through sovereign governments. The commission also plans to present proposals in early September for a single supervisory mechanism to oversee the eurozone banking sector.