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June 29, 2012 at 05:16 AM
After a meeting that dragged on for 14 hours, European Union leaders announced that they had reached agreement on a number of provisions to combat the debt crisis, including a plan to recapitalize banks directly and easier terms for Spanish borrowing. Chancellor Angela Merkel of Germany gave up some ground on the deal, which was sketchy on the details, although she continued to insist that new aid would not be provided without “conditionality.”
Reuters reported that despite a lack of detail on how some of the provisions will be implemented, agreement was reached to allow rescue funds to be used to stabilize bond markets without imposing additional fiscal reforms or austerity measures.
Political leaders also agreed that a single supervisory body would be created by the end of the year, far more quickly than expected, that would be housed under the European Central Bank (ECB) and preside over eurozone banks. After that has been done, the European Stability Mechanism (ESM), the permanent bailout fund due to begin operations in July, is expected to be able to recapitalize banks without boosting the amount of a country’s budget deficit.
The ESM will also forgo preferential seniority status. That is a major step taken to reassure markets, since investors feared that if the ESM directly capitalized Spain’s banks—now that the country has asked for a bailout for its financial sector only—it would have to be paid back first, taking precedence over private bondholders who would then run the risk of not being paid should funding be exhausted. The strategy will also benefit Italy.
