Germany caves in over bond buying, bank aid after Italy and Spain threaten to block 'everything'
GERMANY caved into demands made by Italy and Spain for immediate eurozone aid to bring down their soaring borrowing costs.
On Thursday night, Italy and Spain plunged an EU summit into disarray by threatening to block “everything” unless Germany and other eurozone countries backed their demands for help.
Mario Monti, the Italian Prime Minister, celebrated the agreement, reached in the early hours of Friday, as a “very important deal for the future of the EU and the eurozone”.
He could not resist reminding Angela Merkel, the German Chancellor, that Italy had also won on the football pitch, by defeating Germany two goals to one for a place in the finals of the European Championship.
“It is a double satisfaction for Italy,” he said.
The euro spiked against the dollar after news of the deal and Asian stock markets rose sharply. Japan's Nikkei rose 1.4pc and Hong Kong's Hang Seng gained 2.2pc. However, while the shares in London, Italy and Spain are expected to rise when market open on Friday, those in Germany and France look set to fall.
Under the deal, Spanish banks will be recapitalised directly by allowing a €100 billion EU bailout to transferred off Spain’s balance sheet after the European Central Bank takes over as the single currency’s banking supervisor at the end of the year.
The decision, taken by a meeting of eurozone leaders in the early hours of Friday morning, will be based on a move to put the ECB at the centre of a “effective single supervisory mechanism” for banks after an EU summit in December.
“We affirm that it is imperative to break the vicious circle between banks and sovereigns,” said a summit statement.
Relief for Spain was accompanied by a pledge to begin purchases of Italian bonds using EU bailout funds to reduce Italy’s borrowing costs with a lighter set of conditions, based on meeting Brussels fiscal targets rather than intrusive IMF oversight.
A promise was also made to “examine the situation of the Irish financial sector” offering possible relief to Ireland by relieving the government balance sheet debt burden.
The Spanish bank bailout, to be agreed on 9 July, will initially use the euro’s European Financial Stability Facility (EFSF) before it is transferred into a new permanent fund later this year.
When the transfer takes place to the European Stability Mechanism the new loans will not be given seniority, giving extra security to Spain’s creditors.
After the ECB takes over eurozone banking supervision next year then the Spanish bailout will “very rapidly taken off balance sheet” and directly loaned to banks reducing Spain’s debt burden and borrowing costs.
Herman Van Rompuy, the president of the European Council of EU leaders, hailed the deal as an important step “to reassure markets and to get again some stability around the sovereign bonds of our member states.”
But, he warned, the new aid measures would be reserved for “countries that behave themselves” by abiding by the EU’s fiscal rules and austerity measures.