Following 13 hours of late night negotiations at the 2 day European Union Summit in Brussels, the 17 leaders from the Euro area agreed to soften recapitalization EU banking rules to help contain Italy’ s and Spain’s surging borrowing costs and end the requirement that governments get preferred creditor status on crisis loans to Spain’s cash-strapped banks, a policy which scared away investors from buying Spanish debt, causing Spanish bond yields to rise to dangerous levels.
Under the new adopted terms, EU leaders have agreed to use the euro area’s rescue bailout fund to directly support struggling banks, without being forced to comply with pre-existing EU budget rules that are designed to send Europe’s rescue funds (ESFS and ESM) to sovereign countries with their imposed strings attached, namely, adopting extra austerity measures or economic reforms.
Spanish PM Mariano Rajoy wanted to have the rules changed to avoid taking on additional sovereign debt which comes with an added risk of facing another credit downgrade. Rajoy also wanted his official creditors to give up their preferred creditor status in case of future default, a move that Germany initially resisted ahead the EU Summit which made investors nervous and sent Spanish yields higher.
European Council President Herman Van Rompuy spoke positively about the agreement during a press briefing following the meeting.
“We agreed on something new which is a breakthrough that the banks can be recapitalized directly in certain circumstances and the biggest of the most important condition is that we have to put in place a single supervisory mechanism and second decision is that we are opening the possibilities to countries who are well behaving, that we are opening the possibilities to make use of financial stability instruments ESFS, ESM in order to reassure markets.”
Countries that requested bond support from the rescue fund would have to sign a memorandum of understanding setting out their existing policy commitments and agreeing to a timetable. But they would not face the intrusive oversight of a “troika” of international lenders to which Greece, Ireland and Portugal have been subjected, Italian PM Monti said.
Rescue bailout funds for bank recapitalization won’t be available right away, according to Bloomberg’s senior editor David Tweed on Bloomberg’s On the Move.
The funds will be available at the end of 2012 with supervision from the ECB.
In a move that is seen as one of the first steps towards a euro area banking union, EU Chairman Herman Van Rompuy also said a euro area-wide supervisory body for banks under the ECB would be created, a move that is supported by Germany.
European Council Chairman Herman Van Rompuy said the goal is to create a supervisory mechanism for euro area banks involving the European Central Bank to break the “vicious circle” of dependence between banks and sovereign governments.
Previously, weak banks brought down the financial health of sovereign countries in the euro area and the weak financial health of sovereign countries brought down the financial health of euro area banks.
BBC reports the new growth package, announced by EC Chairman Van Rompuy, is made up of the following:
- A 10 billion-euro boost of capital for the European Investment Bank, expected to raise overall lending capacity by 60 billion euros
- Targeting 60 billion euros of unused structural funds to help small enterprises and create youth employment
- A pilot launch of EU project bonds worth 4.5 billion euros for infrastructure improvements, focusing on energy, transport and broadband
Euro area leaders will return to the table later today to discuss long term plans to build a closer fiscal and banking union.
Leaders have asked Van Rompuy and the heads of the European Commission, ECB and Eurogroup finance ministers to provide detailed proposals of a fiscal and banking union by October.