Mario Monti, the Italian Prime Minister was celebrating a double victory over Germany last week as the Germans capitulated simultaneously on the football pitch and at the negotiating table. Angela Merkel agreed to demands by Italy and Spain for immediate assistance and Eurozone aid in reducing their cost of borrowing. Mario Monti couldn’t resist a little crowing, describing the evening as a ‘double satisfaction for Italy.’
Following the announcement of the deal the Euro shot up against the dollar with Asian and European markets climbing too. The London FTSE 100 rose 1.74% whilst the IBEX in Spain spiked by nearly 5%. As part of the new deal the banks in Spain will be directly recapitalized through the transfer of a 100 billion Euro bailout off of the Spanish balance sheets when the ECB takes over next year. The decision is centred around a move to place the European Central Bank at the heart of a new ‘single supervisory mechanism’ for banks by December. A statement released by the summit noted that they “affirm that it’s imperative to break the vicious circle of banks and sovereigns.”
The relief granted to Spain and the Spanish banks was only part of the deal. It was also accompanied by a EU pledge to start purchasing the Italian bonds through the use of European Union Bailout Funds with the aim of bringing down Italy’s cost of borrowing. This would be done through a less rigid set of conditions which would be based not on the intrusive IMF oversight, but rather on them meeting the fiscal targets set by Brussels. Finally, there was also included a promise by the summit to “re-examine the Irish financial sector” and to consider offering relief to the Irish by relieving the debt burden on the government’s balance sheets.
The bailout of the Spanish banks, which will be agreed on the 9th July, is going to be done initially through the euro’s EFSF (European Financial Stability Facility) before being transferred over to another more permanent fund later on in the year. Spanish creditors will also be granted extra security because the new loans arising through the transfer to the European Stability Mechanism will not be granted any extra seniority. Once the European Central bank takes charge of Eurozone banking supervision the Spanish bailout will very quickly be dropped from the balance sheets and in turn it will be directly loaned out to those banks reducing the borrowing costs and debt burden of Spain.
Herman Van Rompuy, European Council of EU leaders President announced the deal as a crucial step in reassuring markets regaining stability amongst the member states’ sovereign bonds. However Van Rompuy also warned that these new aid measures would only be given to countries that had behaved themselves and that had abided by the strict fiscal rules and austerity measures of the EU.
Esther is a financial writer and blogger. She writes about issues affecting consumers and small businesses, covering everything from interest rates to mortgages, small business loans to purchase order financing.