It took them 13 hours, but eurozone leaders have finally agreed to use bailout funds to recapitalise banks directly. The deal, which was reached at 4am (David Cameron had gone to bed at 1am because this is a eurozone, not EU matter), involved Germany giving in to the demands of Italy and Spain. You can read the statement from the euro area leaders here, but essentially what it says is that the refinancing will not take place until a single banking supervisor is set up, to be run by the European Central Bank. This was originally going to be a long-term project, but leaders have now set a deadline of the end of this year for everything to be up and running.
Angela Merkel was essentially backed into a corner by Italy and Spain at the summit, refusing to agree to anything until the refinancing deal was pushed through. John Redwood argues this morning that the agreement that the leaders eventually reached is actually a form of Eurobonds ‘by the back door’, which Merkel has always opposed. Redwood writes:
‘The problem with the new scheme is that they have to borrow the money to put into the bail out &”funds”. If they borrow it on the credit rating of the bail out fund they have a kind of Eurobond. They are going to need to get on with issuing large quantities of debt to build up this fund. If they are going to beef up the funds with larger member state contributions, then Italy and Spain have to borrow more to help augment the fund, as they are around 30% of the total when it comes to credit status and contributions. We now need to watch their progress financing the funds.’
Cameron will have felt rather relieved, though, when he awoke this morning to discover that any solid agreement had been reached. After all, when he left the room in the small hours, it looked as though the talks were going to break up without agreement. Yet another summit with no firm agreement would have been the last thing the markets were looking for. Instead, they have shown positive signs initially, with the euro gaining as much as 1.5% against the dollar on the Asian markets after the announcement.