Italy and Spain get 'breakthrough' deal on bailout funds
Eurozone leaders in the early hours of Friday morning (29 June) agreed to allow bailout funds to recapitalise banks directly and to buy bonds for "well-behaving" countries - states which are pursuing reforms but suffering from market pressure.
The deal is designed to help Spain and Italy to lower their borrowing costs, but might take several months to implement.
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"We agreed on something new, which is a breakthrough, that banks can be directly recapitalised in certain circumstances... and we are opening the possibility for well-behaving countries to use the EFSF/ESM [bailout funds] to reassure markets and get some stability around their sovereign bonds," EU council chief Herman Van Rompuy said in a press conference at the end of the marathon meeting.
Italy and Spain had earlier filibustered a non-controversial EU "growth pact" worth €130 billion in order to achieve concessions on their immediate concerns: their high borrowing costs.
Germany insisted that the concessions only be made if proper controls are in place, however.
Spain got its long-standing demand of letting banks be directly recapitalised by the eurozone bailout funds, but only once "an effective single supervisory mechanism is established, involving the European Central Bank."
This "will not happen in a few days or weeks, but in the medium term it will achieve the desired effect," said Thomas Wieser, head of the Eurogroup working group of finance ministry officials in the eurozone.
He explained that Spain will have to abide by the current rules for now, which adds the upcoming €100 billion bailout for its banks onto government debt.
Once the new supervisory body is established, the bailout will be "transferred to the new mechanism, so that it can rapidly be taken off Spain's balance sheet," Wieser said.
Madrid also got a concession on the so-called preferred creditor status for the permanent eurozone bailout fund.
Euro leaders decided that the bailout for the Spanish banks will not have such "seniority" - meaning that the permanent European Stability Mechanism will not have any priority compared to other investors in case of default.
For his part, Italian Prime Minister Mario Monti also made some headway in his call for a "semi-automatic" mechanism so that the bailout funds buy government bonds when countries are under market pressure, but without trigerring a bailout procedure, as the rules currently stipulate.
Speaking on his way out of the summit, he said he was pleased the impasse had been overcome.
"There were a lot of discussions, some tension, but we made progress. At our request, we obtained a stabilisation mechanism for countries that are perfoming well under the Stability and Growth Pact, but are still under market pressure, like Italy," he said.
Under this new mechanism, countries would sign a memorandum of understanding about continuing the reforms they are already implementing, but "there would be no troika," Monti explained, in reference to the special monitors from the EU, the International Monetary Fund and the European Central Bank that go every three months to bailed-out countries such as Greece or Portugal.
Van Rompuy also confirmed that the conditions attached to this "flexible" mechanism would reproduce the requirements of the eurozone's beefed up economic surveillance - on budget deficits and macro-economic imbalances.
"There may be just a timeline added to the memorandum, to put some pressure, but the requirements would be the same as the country-specific recommendations," he said, in reference to EU commission-issued reports for each country on where their economy stands compared to the EU rules.
As for the long-term plan for the eurozone, the EU council chief will go back to the drawing board together with the heads of other EU institutions and come back with a "specific timelined roadmap" by October on the banking union, on more sovereignty being ceded to Brussels and on seeking ways to increase "democratic legitimacy and accountability."
Unlike his first report discussed that night and for which there was "no agreement" on substance - Germany opposed the perspective of mutualised debt - the next one will be done "in close co-operation" with member states and also in consultation with the European Parliament, he said.