The European Commission said Wednesday it has approved a Spanish program to recapitalize its banks through the end of 2012.
"The recapitalization scheme is the first stepping stone for fulfilling the recently concluded Memorandum of Understanding," Joaquin Almunia, EC vice president in charge of competition policy, said, referring to a recently approved euro-zone deal to lend Spain's ailing banks up to 100 billion euros ($121.5 billion) over 18 months.
The commission found that the scheme does not violate EU competition rules because "the measures are limited in time and scope and contain incentives to redeem the state participation."
The Spanish program will provide state aid to cover the banks' short-term capital needs, which are to be defined by ongoing stress tests under the terms of the euro-zone rescue plan.
"In addition, the scheme serves as a backstop facility for banks with urgent capital needs materializing before the stress test is completed," the EC's statement said.
Under this program, Spain's financial sector "will be rebuilt on a healthier basis. This is a key precondition for sustainable growth in Spain," Almunia was quoted as saying.
The scheme sets the conditions under which Spain's state-backed FROB bank restructuring fund will bolster institutions that plan to raise private funds over the medium term to cover a financial shortfall, but which need government aid in the interim.
The "distortive effect of the recapitalizations (on competition) will be minimized by adequate remuneration conditions, including annual step-up clauses," the EC said.
As part of the conditions for a recapitalization, banks will face "bans on the payment of dividends and on coupons for hybrid capital instruments."
Banks that are to benefit from a capital injection must submit a restructuring plan that details how they plan to restore their long-term viability without continued state aid.
Numerous Spanish banks are battling to stay afloat after the bursting of a long-building property bubble left them saddled with too many non-performing loans.
The 100-billion-euro rescue package is aimed at shoring up those lenders' balance sheets, but thus far it has failed to reassure the markets and many analysts are calling for the European Central Bank to step in and buy up Spain's sovereign debt.
Record yields on Spain's bonds - as high as 7.75 percent Wednesday in the case of the benchmark, 10-year note - have caused those voices to grow louder.
Spain's economy, already in recession for the second time in three years, will contract by another 0.5 percent in 2013, Finance Minister Cristobal Montoro said last Friday.
Prime Minister Mariano Rajoy's administration, which has pushed through a series of austerity packages over the past several months to bring down the national budget deficit, also expects unemployment to remain virtually unchanged in 2013 at 24.3 percent. EFE