After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels today, leaders of the 17 euro countries dropped the requirement that governments get preferred creditor status on crisis loans to Spain’s blighted banks and opened the door to recapitalizing banks directly with bailout funds once Europe sets up a single banking supervisor.
Enlarge image EU Leaders Ease Debt-Crisis Rules on Spain in Merkel Retreat
German Chancellor Angela Merkel talks to the media upon arrival at the EU summit at the European Council headquarters in Brussels, on June 28, 2012. Photographer: Georges Gobet/AFP/Getty Images
Merkel Hails Major Decisions Amid Monti Pressure
June 29 (Bloomberg) -- German Chancellor Angela Merkel and Italian Prime Minister Mario Monti comment on last night's European Union summit in Brussels. Linzie Janis reports on Bloomberg Television's "Countdown." (Source: Bloomberg)
Enlarge image EU Leaders Ease Debt-Crisis Rules for Spain as Merkel Retreats
Mario Monti, Italy's prime minister, center, Enda Kenny, Ireland's prime minister, left, and Jean-Claude Juncker, Luxembourg's prime minister, during the European Leaders summit at the European Council headquarters in Brussels. Photographer: Jock Fistick/Bloomberg
Enlarge image EU Leaders Ease Debt-Crisis Rules for Spain as Merkel Retreats
Visitors view the city skyline from the roof of the Circulo de Bellas Artes in Madrid. Photographer: Angel Navarrete/Bloomberg
The leaders struggled for consensus on reducing market pressure on Italy and Spain, where surging borrowing costs stoked concern among investors and global policy makers that the currency union threatened to splinter and risk damaging the global economy. They would be allowed access to rescue loans without relinquishing control of their economies.
“We agreed on short-term measures that should apply to Spain and Italy,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro finance ministers. “We will keep all options open to do the interventions that need to be done to calm the situation. There is a whole array of possible interventions and measures.”
Make-or-Break
The gathering marked at least the fourth time in the past year that the guardians of the euro faced a make-or-break summit to restore confidence in their 17-nation bloc. They have struggled so far in vain to contain the financial crisis that began in Greece in 2009. The turmoil claimed its fifth victim this week when Cyprus sought a bailout.
The euro strengthened the most in eight months, increasing 1.1 percent to $1.2579 at 1:06 p.m. in Tokyo to head for the biggest gain since Oct. 27. Futures on the Standard & Poor’s 500 Index advanced 1 percent, and those on the FTSE 100 Index gained 1.7 percent. Finance ministers will enact today’s deal at a meeting on July 9, European Union President Herman Van Rompuy said, calling the accord a “breakthrough.”
It was the first policy-making summit that Merkel faced without France’s Nicolas Sarkozy as her crisis-fighting partner. New French President Francois Hollande led a rebellion against her austerity-first prescriptions with calls for immediate relief for hard-hit countries.
Countering Germany
He put French backing of a German-inspired deficit-control treaty on hold, and Italy and Spain withheld approval of a 120 billion-euro ($149 billion) growth-boosting package until Germany authorized steps to calm their bond markets.
Italian Prime Minister Mario Monti welcomed the result, saying the agreement to consider short-term steps to ease borrowing costs “could be useful to Italy and many other states too.” Hollande said there was “no blackmail, no pressure” from Italy and Spain.
Monti didn’t get everything he wanted, Dutch Prime Minister Mark Rutte told reporters. Italy “wanted direct bond buying by the aid funds in the secondary market,” he said. “That’s not going to happen. They wanted an interest-rate cap. That’s not going to happen either.”
Germany had balked at changing the order of seniority on as much as 100 billion euros in emergency loans to Spanish banks and at committing to direct sovereign-debt buying through the euro-area bailout funds, saying on June 21 that such a move is “not up for debate.”
‘Flexible’ Funds
At the summit, euro-area leaders agreed to use the rescue funds “in a flexible and efficient manner in order to stabilize markets for member states” that respect rules including budget- deficit limits and sign a memorandum of understanding, according to an EU statement issued in Brussels.
Even so, the EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting its ability to lower the nations’ borrowing costs.
The rescue mechanisms, the European Financial Stability Facility and the yet-to-start ESM, may have 500 billion euros ($621 billion) available for purchases. Italy and Spain have about 2.4 trillion euros combined of outstanding bonds, bills and loans, according to data compiled by Bloomberg.
Pooling of euro-area debt, a tool sought by Spain and Italy that Merkel called “wrong and counterproductive” in a speech to Germany lawmakers a day before the summit, wasn’t mentioned in the statement. Merkel will explain the deal to the German parliament upon her return to Berlin today before a vote on new EU budget rules and authorizing the ESM.
‘Vicious Circle’
Euro-area leaders are determined to “break the vicious circle between banks and sovereigns” in the debt crisis and will present proposals for joint bank supervision “shortly,” according to the statement.
Once an “effective” system is set up, the ESM could, “following a regular decision, have the possibility to recapitalize banks directly,” according to the statement.
Spain’s Mariano Rajoy sought that condition to avoid taking on additional sovereign debt. He also wanted his official creditors to give up their preferred creditor status in case of default, a step resisted by Germany that helped send Spanish yields higher.
Spain’s 10-year yields exceeded 7 percent yesterday and Italy auctioned 10-year notes at 6.19 percent, the highest yield since December. Germany borrows at 1.5 percent for the same time period.
Relief may not be quick as joint EU banking supervision, seen as a way to make oversight more independent of national regulators, will take time. The EU will consider proposals “by the end of 2012,” according to the statement.
‘Medium Term’
“If you think in terms of, not the short term, of days and weeks, but in terms of sustainability over the medium term, then this will achieve the desired effect,” Thomas Wieser, head of the group that prepares meetings of euro-area finance ministers and that drafted the summit statement, told reporters.
Merkel left the summit, which continues at 10 a.m., without addressing specifics of the agreements. She said there were decisions on “future measures within the framework of our methods that we will have through” Europe’s two rescue funds. “I think we will have a successful conclusion.”
Source : Bloomberg
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