EU deal for Spain, Italy buoys markets but details sketchy
Economists and non-euro EU leaders cheered Friday's euro zone summit deal as a surprise “breakthrough” in efforts to preserve a stable currency, yet crucial details still need to be filled in.Updated: Jul 01, 2012 21:37 IST
Economists and non-euro EU leaders cheered Friday's euro zone summit deal as a surprise “breakthrough” in efforts to preserve a stable currency, yet crucial details still need to be filled in.
With market expectations low ahead of the European Union summit, a deal that bolstered confidence in the euro was wrenched after all-night talks between euro zone leaders, bringing swift relief to crisis-hit Italy and Spain.
The single currency leapt in value and bond yields tumbled as it appeared that politicians might finally have got ahead of the markets, though it remained to be seen for how long.
EU president Herman Van Rompuy hailed a “real breakthrough” in efforts to prevent future crises as the 17 euro zone members agreed to let the future European Stability Mechanism (ESM) recapitalise ailing banks directly.
That means ESM credits will not pass through national budgets, which in a vicious circle simply adds to the sovereign debt of struggling countries.
Spain, which has been promised loans of up to €100 billion ($126 billion) for its ailing banks was the main beneficiary, but the move could also mean crucial relief for Ireland, where government backing for banks plundered the nation’s accounts.
The ESM is also to be allowed to buy debt directly from euro zone states before they need a rescue, subject to conditions that were still a matter of debate when the summit ended.
The ESM must first be ratified however, and the new provisions will only take effect once a euro zone-wide banking supervisory body is set up around the European Central Bank, which likely will at least six months.
Among details to be worked out is how much sway the supervisor will have over smaller institutions, such as troubled German state-owned regional banks.
Another is how the body will deal with big banks outside the euro zone, such as those in Europe's financial centre London.
In the meantime, euro zone leaders also cobbled together 120 billion euros to boost growth and employment, and launched a pilot “project bond” programme.
Economists welcomed the moves but identified a possible stumbling block, a finite amount of funds approved for the ESM that would cover only a fraction of the debt weighing on Italy and Spain.