Eurozone agrees pact on bank recapitalisation, stimulus and single supervisor

29 June 2012

European leaders meeting at an EU summit in Brussels have reached agreement on providing financial injections for struggling financial institutions, paving the way for Spain’s planned €100bn recapitalisation of its banks to go ahead. An eventual ‘banking union’ and single regulator for the 17-member eurozone was also outlined, alongside greater budgetary and political union, desired by Germany, and a €120bn stimulus package, wanted by France.

The agreement, reached early on Friday after all-night talks, was described by the EU Council president, Herman van Rompuy, as a “breakthrough that banks can be recapitalised directly” without having to go via governments, thereby damaging their sovereign rating. A statement issued on behalf of leaders at the summit read: “We affirm that it is imperative to break the vicious circle between banks and sovereigns”.

An accord was reached only after Germany relaxed its demands for stringent reforms in return for rescue money, with Spain and Italy having applied pressure for less demanding ‘austerity’ conditions than those applying to previous bailouts. However, although the latest agreement reached at this week’s summit in Brussels paves the way for Italy to be the next eurozone country to receive EU assistance Italian premier, Mario Monti, said that his country did not intend to apply for funds to assist its banks – just as the Spanish premier did before him.

A prerequisite for the recapitalisation of Spain’s banks will be the setting up of a single banking supervisor to be overseen by the European Central Bank (ECB), which was agreed by leaders of the 17-nation eurozone. A general, although still non-specific, longer-term plan was also agreed for tighter budgetary and political union in the future among the 17 eurozone members, with more detail expected to follow.

In addition, EU leaders agreed during the negotiations to provide a €120bn package to stimulate economic growth and create jobs. Summarising what had been achieved, France’s president Francois Hollande – the main proponent of a growth pact – said there had been three advances at the summit.

“The first [advance] is on the recapitalisation of the banks with banking supervision and with a calendar. The second [advance] is to allow easier solutions for Spain, which can be put into effect rapidly,” said Hollande. “And finally, there will be full use of the [bailout] instruments, the European Financial Stability Facility (EFSF) and the European Stability Mechanism (ESM), to give states that have made efforts the necessary protection in relation to interest rates.”

Reaction and analysis
Commenting on the summit Andrey Dirgin, head of research at the Forex Club brokerage, said: “To the surprise of many, EU leaders appear to have finally managed to take significant steps to restore the market’s confidence and support risk assets.

“While many had written off this EU leaders’ summit as ‘another boring event’, the lengthy negotiations and discussions saw (German chancellor) Angela Merkel give in and agree to ease the repayment rules for Spanish emergency loans. As a result, the country may be able to get direct recapitalisation of banks, once the ECB becomes a single banking supervisor.”

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