Finland doesn’t want any of Spain’s bailout to prop up unhealthy lenders and expects some troubled banks to be split up as the northernmost euro member outlines the conditions it understands are attached to the rescue deal agreed on June 9.

“The unhealthy banks should be brought down or some banks should be possible to chop up” so that the healthy parts continue and the rest ends in a so-called bad bank, Katainen said in an interview in Norway. “There must be a possibility to restructure the banking sector because it doesn’t make sense to recapitalize banks which are not capable of running.”

Spain this weekend became the fourth euro member to seek a bailout as the bloc’s finance ministers agreed to provide as much as 100 billion euros ($126 billion) to save the country’s banks. Katainen said today his government is unlikely to need collateral in exchange for its backing as the funds will probably come from the permanent European Stability Mechanism, which gives official creditors seniority over existing bondholders.

“Hopefully the ESM will be in force” by the time Spain’s bailout funds start flowing, Katainen said. “It would be simpler and better in many ways and I have understood that the majority of the euro-area countries would support using the ESM instead of” the European Financial Stability Facility, which entitles Finland to collateral, he said.

Several Weeks

Euro-area leaders have yet to announce which of the two funds will be used to pay for Spain’s loan. Granting the bailout “will take several weeks, as we need a very precise analysis on the condition of Spanish banks,” Finnish Finance Minister Jutta Urpilainen said on June 9. The ESM becomes effective next month.

Germany’s government today signaled it wants Spain’s rescue to come from the permanent fund. German Finance Ministry spokesman Martin Kotthaus called the ESM a “more efficient option,” at a regular government briefing in Berlin.

Katainen also said he considers the supervision of Spain’s banks through the International Monetary Fund, the European Commission and the European Central Bank to be a precondition of the nation’s bailout.

The weekend’s rescue agreement helped reduced the risk of contagion in Europe as leaders for “the first time” managed to throw together a deal “ahead of the curve,” Katainen said.

Still, Spanish 10-year bonds erased gains as yields soared as much as 20 basis point to 6.41 percent. Italian borrowing costs on similar-maturity debt rose 17 basis points to 5.94 percent.

“I am afraid of instability but hopefully the market also sees that a lot has been done,” Katainen said.