Today, the European Commission (EC) announced its approval of certain measures proposed by the Spanish government to stabilize its financial markets “by providing liquidity to eligible financial institutions.” The EC found the terms of the Spanish proposal “to be in line with its Guidance Communications on state aid to overcome the current financial crisis.”

Competition Commission Neelie Kroes noted that, “[t]hanks to extensive and fruitful cooperation between the Spanish authorities and the Commission, the Spanish fund for acquisition of financial assets has been properly designed to boost market confidence and avoid distortions of competition.”

The Spanish measures include a government-sponsored fund that will purchase AAA-rated covered bond assets in reverse auction transactions. In addition, the government-sponsored fund will be able to engage in reverse repo transactions involving “highly-rated covered bonds or asset backed securities” (not rated lower than AA) in which participating banks must repurchase the assets “at a pre-fixed price at a later date.”

Although the Commission stated that it has been hesitant to permit member states to purchase financial assets from financial institutions, the Commission acknowledged that, “the scheme and the commitments constitute an appropriate means to restore confidence as regards the medium-term liquidity provisions for Spanish banks.”

Last week, the EC also approved initiatives adopted by the Netherlands, France, Sweden and Portugal to mitigate the global credit crisis.