European leaders have agreed to channel EU bailout funds directly to endangered banks, after the establishment of a Eurozone banking supervisory body, European Council President Herman Van Rompuy said early Friday.
The decision will immediately relieve pressure on Spain which has this week sought a 100 billion euro rescue for its troubled banks. It will also relieve pressure on Italy which is widely expected to be the next nation to seek EU assistance.
Following marathon talks, Eurozone nations agreed a new eurozone banking supervisor will be established before the end of this year, and that once this has been established then the European Stability Mechanism will be able to recapitalize failing banks directly, without the loans going via sovereign accounts and adding to the debts burdens faced at a nation level.
The announcement has come after Spain and Italy threatened to veto any progress on talks at the EU leaders summit in Brussels unless their short term financial crises were addressed. In related decisions the European Financial Stability Facility and the European Stability Mechanism will be allowed to purchase not only sovereign bonds of troubled countries such as Greece, Portugal and Ireland, but also bonds of other states, in order to reassure markets.
"We are opening the possibilities for countries that are well-behaving to make use of financial stability instruments, the EFSF and ESM, in order to reassure markets and get again some stability around some of the sovereign bonds of our member states," Rompuy said, quoted by The Guardian.
Market participants expect the euro to fall further against the greenback if EU leaders fail to agree on measures help pull eurozone countries out of the sovereign debt crisis, which has seen Greece, Portugal and Ireland receive bailout funds within the last 18 months, and has seen their ranks joined by requests from Spain and Cyprus for support,within the last two weeks.
European leaders are gathering in Brussels on Friday to focus on short-term efforts to stem rising yields in the eurozone peripheral countries, and discuss a comprehensive and long-term strategy for economic and monetary union reorganization.
Spanish and Italian bond yields have been close to the point at which they are considered unsustainable by markets. As of Thursday's close, The yield on Spanish 10 year bonds was 6.9 percent, with Italy also placing bonds this week at 6.2 percent.
