Brussels, 29/06/2012 (Agence Europe) - The efforts of the Italian and Spanish prime ministers, Mario Monti and Mariano Rajoy, who hijacked the growth pact (see separate article) paid off. The eurozone, which held an emergency meeting on Thursday night rather than Friday 29 June, took the decisions demanded by Italy and Spain, countries facing spiralling interest rates on their sovereign debt. The EFSF and ESM bailout funds will buy up on the secondary markets bonds of eurozone nations that meet their budget commitments and are reforming their economies. Once the ECB is made single bank supervisor for the eurozone, the countries will be able to have aid to bail out their banks flowing directly to the banks rather than deepening the public debt.
The president of the European Commission, José Manuel Durão Barroso, welcomed the eurozone's commitment to the irreversibility of the euro. Rajoy said everyone agreed on defending the euro, which had emerged as the great victor at the summit. The president of the European Council, Herman Van Rompuy, read out the eurozone leaders' statement: “It is crucial to break the vicious circle between the banks and countries.” To this end, the eurozone says it is prepared to make use of the EFSF and ESM in a flexible and effective manner in order to stabilise the market for countries like Italy and Spain which respect their macroeconomic and budget commitments under the stability and growth pact but are coming under attack from the money markets.
This is the most immediate measure for eurozone. The French president, François Hollande, said there was no need for a new treaty, just making use of existing mechansims to make them play an effective role in combating speculation and protecting countries whose sovereign debt are coming under unjustified attack. Mario Monti said that Italy had been calling for this but was not planning to make use of it any time soon, although it might be called upon in the future.
The eurozone leaders instructed their finance ministers to decide at the Eurogroup meeting of Monday 9 July how the bailout funds are to buy up the bonds of nations being picked on by the financial markets. A key question is the strings to be attached to this. A memorandum of understanding between countries in question and institutional lenders will set out the macroceconomic and budget recommendations of the European Commission under the European semester and give possible timings, said Thomas Wieser, who chairs the euro working group at the Council of the EU. The Commission's recommendations were endorsed by the European summit on Friday and made legally binding (a legal first) on Friday for countries making use of the mechanism. Calling the 9 July deadline “ambitious but do-able”, Wieser said that the system for this would could be put in place over the summer.
Work on a Banking Union. Spain scored here too. Its call for direct recapitalisation of Spanish banks by the eurozone bailout funds paves the way for a banking union. The eurozone has formally requested that the European Commission shortly unveil draft legislation on a single surveillance mechanism for eurozone banks and that the Council of the EU urgently examine the matter (before the end of the year). Under Article 127(6) of the EU treaty, a banking union would give the ECB special prudential control powers over eurozone banks, but not insurance companies.
Once this has been established, the ESM would be able to directly recapitalise banks, explained the eurozone according to suitable conditions specific to the banks to be bailout out and would cover the entire financial industry or even the entire economy. The conditions will be set out in a structural adjustment programme.
Van Rompuy said this was a great step forward. Hollande said that bank supervision should cover all banks in the eurozone to avoid a Spanish scenario whereby bad banks send good banks away. In order for the bailout funds to directly bail out eurozone banks, certain preconditions would have to already be in place, explained Wieser, who sees the eurozone decision as guaranteeing the affordability of Spain's debt in the immediate term.
The eurozone called for the memorandum on recapitalising Spanish banks to be drawn up urgently. The Eurogroup has promised to provide up to €100 billion (see EUROPE 10644). The aid will come from the EFSF until the ESM is up and running. Whichever fund it comes from, the eurozone nations providing aid to Spain will not be given priority lender status. Rajoy said this was a key element. Barroso said it was a way of winning confidence on the markets. The head of the Eurogroup, Jean-Claude Juncker, said that is was only for Spain that restrictions had been placed on privileged lender status and great concessions had been made to Spain because in terms of spending cuts, it has already done exactly what we asked it to do. In the early hours of Friday morning, Juncker said that the eurozone leaders were keeping all their options open in terms of market intervention to restore calm on the markets, where “anything is possible”.
Strings or no strings? Activation of the new mechanisms has reopened the debate among potential debtor and creditor countries. The German chancellor, Angela Merkel, described by some of the media as the big loser at the summit, says strings must be attached to any loans. She said that her philosophy had been respected - no cash without something in return, conditions and controls. Van Rompuy said that struggling countries had to be supported, but the countries had to smell the coffee and come up with results. There are no free lunches and conditions are vital, said Van Rompuy, adding that responsibility and solidarity always went hand-in-hand, an idea backed by the president of the ECB, Mario Draghi.
Monti disagrees, saying that no strings had been attached. He said implementation of the memorandum on activation of the bailout fund to buy bonds of struggling countries would not be monitored by a troika (Commission, ECB and IMF) but would be accompanied by flexible technical assistance from the three organisations. (MB/AN/CG/EH/FG/LC/transl.fl)