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EU Leaders Ease Debt-Crisis Rules on Spain in Merkel Retreat

Friday, 29 Jun 2012 06:59 AM

Euro-area leaders agreed to ease repayment rules for emergency loans to Spanish banks and relax conditions on potential help for Italy as an outflanked German Chancellor Angela Merkel gave in on expanded steps to stem the debt crisis.

After 13 1/2 hours of talks ending at 4:30 a.m. in Brussels Friday, leaders of the 17 euro countries dropped the requirement that governments get preferred creditor status on crisis loans to Spain’s blighted banks, European Union President Herman Van Rompuy said. Banks can also be recapitalized directly with European bailout funds rather than being channeled through governments, he said.

The leaders also discussed ways to reduce the risk premiums on Italian and Spanish bonds, which have stoked concern among investors and global policy makers that the currency union threatened to break apart.

“There is a whole array of possible interventions and measures,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the group of euro finance ministers. It’s the task of the European Central Bank, euro-area governments, the EU “and others to pull out the right card at the given time.”

The gathering marked at least the fourth time in the past year that the guardians of the euro faced a make-or-break summit to restore confidence in their 17-nation currency union. They have struggled so far in vain to contain the financial crisis that began in Greece in 2009. The turmoil claimed its fifth victim this week when Cyprus sought a bailout.

No Sarkozy

It was the first policy-making summit that Merkel faced without France’s Nicolas Sarkozy as her crisis-fighting partner.

Instead, new French President Francois Hollande led a rebellion against Germany’s austerity-first prescriptions with calls for immediate relief for hard-hit countries. He put French backing of a German-inspired deficit-control treaty on hold, and Italy and Spain withheld approval of a 120 billion-euro ($149 billion) growth-boosting package until Germany authorized steps to calm their bond markets.

Italian Prime Minister Mario Monti welcomed the result, while saying that euro leaders don’t plan to boost the region’s bailout funds. Hollande said there was “no blackmail, no pressure” from Italy and Spain.

‘Vicious Circle’

Euro-area leaders are determined to “break the vicious circle between banks and sovereigns” in the debt crisis and will present proposals for joint bank supervision “shortly,” according to an EU statement issued after the talks.

Once an “effective” system is set up, the European Stability Mechanism, the planned permanent bailout fund, could “following a regular decision have the possibility to recapitalize banks directly,” according to the statement.

Spain’s Mariano Rajoy sought that condition to avoid taking on additional sovereign debt. He also wanted his official creditors to give up their preferred creditor status in case of default, a step resisted by Germany that helped send Spanish yields higher.

Merkel left the summit, which continues at 10 a.m., without addressing specifics of the agreements. She said there were decisions on “future measures within the framework of our methods that we will have through” Europe’s two rescue funds. “I think we will have a successful conclusion.”

The euro rose to as high as $1.2628, the strongest since June 21. Euro-area finance ministers will enact today’s deal at a meeting on July 9, Van Rompuy said, calling the accord a “breakthrough.”

Even so, the EU’s two rescue funds may only amount to about 20 percent of the outstanding debt of Italy and Spain, limiting its ability to lower the nations’ borrowing costs.

The EU’s two rescue mechanisms, the European Financial Stability Facility and the yet-to-start ESM, may have 500 billion euros ($621 billion) available for purchases. Italy and Spain have about 2.4 trillion euros combined of outstanding bonds, bills and loans, according to data compiled by Bloomberg.


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