Eurozone countries agree to bailout banks directly

29 Jun 12
Eurozone leaders last night agreed to use the single currency bloc’s bailout funds to recapitalise struggling banks directly instead of channelling the money through governments.

By Nick Mann | 29 June 2012

Eurozone leaders last night agreed to use the single currency bloc’s bailout funds to recapitalise struggling banks directly instead of channelling the money through governments.

In a move they said would to break the ‘vicious circle between banks and sovereigns’, the leaders set out plans for the European Commission to present proposals for a single banking supervisory mechanism run by the European Central Bank.

Once in place – ideally by the end of 2012 – it would be able to recapitalise banks in the eurozone using the European Stability Mechanism bailout fund.

Spain is likely to be the first beneficiary, with financial assistance provided through the temporary European Financial Stability Facility bailout fund until the ESM becomes available.

Eurozone countries will also consider a fresh bailout of the Irish financial sector ‘with the view of further improving the sustainability of the well-performing adjustment programme’.

In a statement issued this morning, they affirmed their ‘strong commitment to do what is necessary to ensure the financial stability of the euro area, in particular by using the existing EFSF/ESM instruments in a flexible and efficient manner’.

In particular, bailout funds would be used to support member states’ efforts to meet the country-specific recommendations for economic and spending policy made by the European Commission last month. They could also be used to meet other commitments made under agreements such as the Stability and Growth Pact.

The leaders, meeting during a two-day European Council summit in Brussels, also agreed a €120bn package of ‘immediate measures’ for growth. Half of this will come from a €60bn increase in the lending capacity of the European Investment Bank. This will be raised from €10bn capital provided by EU countries.

The remaining €60bn comes from the reallocation of €55bn of unused structural funds and €5bn from the pilot phase of the project bonds credit guarantee scheme, scheduled to be launched this summer. Plans for the scheme, which aims to companies raise funds for infrastructure projects by issuing bonds, received European Parliament backing last month.

Herman Van Rompuy, president of the European Council, said: ‘Growth is the overriding concern in every aspect of our work – be it improving the single market, tackling unemployment or promoting trade and innovation.

‘The growth agenda is a sign of our unrelenting commitment. It brings together all the concrete measures that we will swiftly take, in each member state and together as a union.’

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