Luis de Guindos, Spanish economy minister, on Monday formally requested assistance from the country's euro zone partners to help recapitalize Spanish domestic banks, which are burdened by bad loans to property and construction companies and by a continuing sovereign debt crisis.
In a letter to Jean-Claude Juncker, the Luxembourg prime minister who heads the eurogroup of euro zone finance ministers, Mr. de Guindos confirmed that the aim was to agree details and conditions of the loan in a memorandum of understanding before the next eurogroup meeting on July 9.
"I have the honour to address you in the name of the Government of Spain to make a formal request for financial help for the recapitalization of Spanish financial institutions that may require it," the letter said.
No amount was mentioned in the letter but Spain is thought to be looking for up to €100-billion.
Funds will go to the state Fund for Orderly Bank Restructuring (Frob), which will direct the money to banks in need. But the process will be closely monitored by the European Commission, the European Central Bank and the International Monetary Fund as well as by Spanish institutions.
But European institutions and governments have continued to voice differences over how to apply the bailout and broader fiscal and banking reforms needed to restore investor confidence in the debt of countries such as Spain and Italy.
Spain's difficulties in raising money via the sovereign bond markets, and its admission two weeks ago that it needed aid for its domestic banks, has fuelled expectations among investors that the country would become the fourth member of the euro zone after Greece, Ireland and Portugal to need a full rescue.
As a condition of the bank bailout for Madrid, Spain's euro zone partners are likely to require a deep restructuring of the Spanish domestic banking sector, which could involve the creation of one or more "bad banks" to house property assets and the forced liquidation of insolvent institutions.
Officials will look at restructuring examples from Ireland, where a central "bad bank" was created, and Germany, where "toxic" assets were placed in separate vehicles alongside individual banks.
Other crucial disputes have yet to be resolved, including whether the aid money should go directly to the banks rather than to the Spanish government as currently envisaged, on the grounds that a loan to the sovereign simply increases Spain's public sector debt and makes it even more difficult to borrow commercially.
A paper prepared for the EU summit says leaders should explore giving the EU's bailout funds the power to take stakes in banks directly, according to the latest drafts.
"We will discuss this at the European summit, and this possibility is absolutely open to Spain if there is progress in the next few months," Mr. de Guindos said at a meeting of EU finance ministers in Luxembourg last week. "The process of recapitalization is not instantaneous."
Another argument concerns debt seniority, with Germany wanting Spain to borrow from the European Stability Mechanism, the bailout fund expected to be launched next month, because it has "seniority" over other creditors and thus safeguards German and other contributors in the event of a default.
Critics of the German position say investors' fears of the ESM having precedence over ordinary bondholders was precisely what caused Spanish bond prices to tumble after Spain first called for help on June 9.
Spanish and other European leaders have accepted that they need to move towards some kind of "banking union" within the euro zone as well as towards the integration of fiscal and economic policies, but these are long-term changes that will not solve Spain's difficulties in the immediate future.
"Europe is crying out for greater fiscal, financial and political integration," María Dolores de Cospedal, secretary-general of Spain's governing centre-right Popular party, said at the weekend. "We know that Europe must be strong so that Spain can be strong."