Markets surge on wave of optimism that deal will now stabilise the euro
GLOBAL stock markets surged yesterday as traders celebrated an unexpected deal that should help to stabilise the eurozone after months of financial turmoil.
Sinner states led the rally as fears of immediate default dissipated. The Italian stock market climbed 6.6pc; the Spanish Ibex rose 5.7pc and the Athens stock exchange closed up 5.7pc.
The agreement, which was secured by an alliance of France, Italy and Spain against Germany, broke a deadlock that has gripped financial markets for weeks.
Following 13 hours of what insiders described as "horrid" negotiations, a deal was finally agreed in the early hours of yesterday.
A key part of the deal was the agreement to give the ECB new powers to regulate eurozone banks, the first step towards a banking union that Germany has long argued for. Leaders also agreed a €120bn package of growth measures and the start of negotiations for closer fiscal and economic co-operation.
After a single banking supervisor is set up, eurozone bailout funds will also be able to recapitalise ailing banks directly, rather than handing the money to member states.
Mario Monti, the Italian prime minister, claimed a double victory over Germany hours after his country's football team had beaten the Germans in their Euro 2012 semi-final.
The Germans were said to be "irritated" at Italy's "spin". One diplomat said: "Angela Merkel can still turn off the cash tap. She has not given up the right to impose strict conditions on countries using the bailout funds."
Ms Merkel insisted that the deal did not violate her principle of no aid without conditionality or the guidelines set by the German parliament.
"There was pressure here to find a solution and I saw my role as ensuring that these solutions should respect the procedures that we already know and have," she said.
The deal on Spanish banks, set to receive up to €100bn, will allow Spain to recapitalise the sector without increasing the level of the country's sovereign debt.
The deal was widely seen as a political victory for embattled Italian Prime Minister Mario Monti and his Spanish counterpart, Mariano Rajoy, over German Chancellor Angela Merkel, who had brushed aside any need for such emergency measures earlier this week.
Both Italy and Spain said they did not intend to call on that mechanism to stabilise markets for now, hoping the Brussels agreement would serve as a sufficient deterrent.
In a key concession by EU paymaster Germany, the leaders agreed to waive the ESM's preferred creditor status on lending for Spanish banks, removing a key deterrent to investors buying Spanish government bonds, who feared having to take the first losses in any debt restructuring.
Despite the concessions by Berlin questions remained about the terms, size and supervision of any future aid for Spain and Italy.
The Spanish and Italian leaders had threatened to block a package of measures to promote growth to pressure her to accept measures to ease their borrowing costs, delaying the talks.
New French President Francois Hollande backed their calls for bold steps to help the bloc's third- and fourth-biggest economies, adding to the pressure on Ms Merkel.
Mr Hollande, who had demanded a renegotiation of the fiscal pact to switch Europe's focus from austerity to promoting growth, said he had achieved satisfaction at the summit and would now submit the treaty to parliament for ratification.