Breakthrough in Europe bank talks send Spain, Italy borrowing costs down

Jun. 29, 2012
Breakthrough in Europe bank talks send Spain, Italy borrowing costs down
By Roy Gutman | McClatchy Newspapers

BRUSSELS -- ]

After tough discussions that lasted through the night, European leaders agreed early Friday on new steps to reduce borrowing costs for Italy and Spain. The unexpected breakthrough injected new hope that the European debt crisis can be stabilized and boosted the euro and stock markets in Europe and Asia.

Both countries saw an immediate drop in the interest rates for government borrowing. Italy’s costs fell to 4.5 per cent and Spain to 5.8 per cent, well below the 7 per cent Madrid has had to pay in recent days.

The deal calls for creating of a single supervisor to oversee banks in the euro currency zone and once that is in place, for the European Central Bank directly to recapitalize troubled banks. Up to now, national governments have had that burden exclusively, and lack of market confidence had driven Spanish borrowing costs to unsustainable levels.

It also provided for new ways to assist Italy to reduce its borrowing costs, with the help of eurozone funds to be made available this summer.

“We agreed on something new, which is a breakthrough, that the banks can be recapitalized directly in certain circumstances, and the biggest and most important condition that we have to put in place a single supervisory mechanism,” Herman van Rompuy told reporters at about 4 a.m.

“And the second decision is that we are opening the possibility to countries who are well-behaving…to make use of financial stability instruments, the (European Financial Stability Fund and European Stability Mechanism) in order to reassure markets and to get again some stability around the sovereign bonds of our member states.”

Until the announcement of the breakthrough, an air of gloom had dominated the summit, with German Chancellor Angela Merkel, representing Europe’s biggest economic power, refusing to consider using European funds to recapitalize banks or to guarantee sovereign debt of member states.

Italy and Spain refused to give final approval to a modest jobs and development initiative, a move that apparently delayed the long awaited discussion of ways to alleviate their financial distress.

But on arriving for a second day of meetings Friday, Merkel proclaimed the overnight deal a victory for German principles of accountability and discipline in fiscal management. “We made an important decision overnight,” she said.

She said European financial instruments used to reduce borrowing will be made available on conditions, including a detailed analysis of the country’s finances by the European Commission, a memorandum of understanding and outside supervision. She emphasized the importance of establishing a “super-regulatory body” to oversee the recapitalizing of banks in member states.

German principles of accountability had been upheld – performance according to stated criteria, counter-moves in recognition, conditionality and control. “I think we have done something important,” she said.

Britain, the biggest EU member not to adopt the euro, also welcomed the accords.

“The countries of the euro-zone did take some important steps last night,” Prime Minister David Cameron told reporters. “For a long time we’ve been saying more action needs be taken for short term financial stability, to recapitalize banks, to use firewalls, to drive down bond spreads and interest rates, to create financial stability. I think they took some important steps last night, and I very much applaud that.”