The Eurogroup panel of eurozone finance ministers on Friday reached a deal on a loan of up to 100 billion euros (121.9 billion dollars) to help Spain recapitalize its banks.
The agreement was reached during a teleconference meeting. Madrid is expected to receive a first installment of 30 billion euros before the end of the month.
However, the approval failed to calm markets, as Madrid's borrowing costs reached new record levels.
Risk differentials between the Spanish 10-year bonds and equivalent German ones from Germany rose to 6 percentage points, while yields stood at 7.17 per cent - well above the critical 7-per-cent threshold.
"Ministers unanimously agreed today to grant financial assistance" to Madrid, a statement released by the office of the president of the Eurogroup panel of euro area finance chiefs, Jean-Claude Juncker, said in Brussels.
The approval came a day after the lower house of the German parliament, the Bundestag, gave its consent to the aid package, and a few hours after it had been approved by the Finnish parliament, with 109 lawmakers voting in favour and 73 against.
Earlier this week, Finland struck a deal to secure a collateral of up to 770 million euros from Spain in return for its contribution to the aid package. Helsinki had obtained similar guarantees from Greece before accepting to take part in that country's second bailout.
In return for the aid, Spain will have to embark on "in-depth bank restructuring plans ... and sector-wide structural reforms" to clean up lenders' balance sheets, which were badly affected by the collapse of a housing boom, the Eurogroup said.
It was also asked to stick to EU deficit reduction and economic reform commitments - which have already forced the conservative government of Prime Minister Mariano Rajoy to push through parliament a deeply unpopular 65-billion-euro austerity package.
Detailed conditions for the bank aid are to be spelled out in a memorandum of understanding "that will be signed in the coming days," the Eurogroup added.
Spain - the fourth eurozone member to receive financial help - is expected to receive a first aid installment of 30 billion euros by the end of the month.
It was forced to ask for help in June, after its fourth largest bank - Bankia - asked for 19 billion euros in state aid, in addition to 4.5 billion euros received previously. Madrid has a large budget deficit and faces steep borrowing costs, so it was hard-pressed to come up with the cash itself.
On Friday, ministers confirmed that eurozone governments lending to Spain would not enjoy greater protection over other creditors in case the country defaulted - an issue of concern for investors in recent weeks.
But they made no reference to lending money directly to Spanish banks - bypassing the government so as to avoid increasing its public debt. Such a possibility was raised at a summit last month, provided that a central eurozone bank supervisor was established first.
"The Spanish government will retain the full responsibility of the financial assistance," the Eurogroup said.
Madrid is not expected to tap into the full 100 billion euros offered by eurozone partners. Its final needs should be determined by the outcome of stress tests on the Spanish banking sector, due out in September.
The country is desperate to limit eurozone help to its banks, and avoid a full-blown bailout of the type that has been extended to Greece, Ireland and Portugal. But it cannot cope for long if its borrowing costs remain high.
The European Commission on Thursday dismissed suggestions that any money left over from the bank bailout could be used to buy Spanish government bonds.
Such a measure would provide some relief, by reducing yields on Spanish bonds. Italy, which is also dealing with soaring borrowing costs, has also been tipped as a potential candidate for a eurozone-funded bond buying programme.
Risk differentials between Italian 10-year bonds and German ones were above 5 per centage points on Friday, while Italian yields rose to 6.16 per cent.
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