European Union plans to channel cash directly into distressed banks via the eurozone's new debt bailout fund were high on the agenda as finance ministers gathered for crisis talks on Monday.
EU leaders agreed at a summit 10 days ago to set up a single bank supervisory authority as soon as possible, as a precondition for the European Stability Mechanism (ESM) to recapitalise banks directly, rather than through governments.
Spain, under pressure on financial markets as its long-term borrowing costs reach unsustainable levels, called for such direct aid to stabilise its banks so as to avoid adding to its existing sovereign debt burden.
But the ministers will need to clarify whether -- and when -- states might have to guarantee any direct aid given to the banks before the supervisory authority comes into being, an event that "will not occur before the first half of 2013," a senior EU official said Friday.
"Before we change the overall approach, any recapitalisation is against the guarantee of the sovereign," said the official, speaking on condition of anonymity.
"The first Spanish banks will need to be recapitalised by the end of this year, and many others in the spring of next year," he added.
In a distant future, when a single supervisor oversees all eurozone banks, sovereign guarantees "might not" be demanded in exchange for recapitalisation funds, the official added.
On Monday, a spokesman for the EU's economic affairs commissioner Olli Rehn said that "once a single supervisory authority is in place, the ESM can decide to recapitalise directly and there will be no sovereign guarantees."
"With the caveat that the instrument still needs to be drawn up, that is the principle we will be working on," added Rehn's spokesman Simon O'Connor.
The eurozone's 17 finance ministers were expected at Monday's talks to reach "a political agreement" on a rescue for Spanish banks that would be formalised at new talks expected July 20.
On arriving for the meeting, French Finance Minister Pierre Moscovici called for quick progress on banking supervision. "We must advance strongly on banking supervision, it is important to move quickly."
He called for an operational mechanism to be in place by the end of the year "to enable us to advance on direct recapitalisation by the ESM."