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Eurozone bank bailout deal throws lifeline to Spain and Italy
Italy and Spain stunned Germany by blocking progress until they obtained softer bailout rules in 14 hours of bad-tempered talks
European leaders have pulled back from the brink of disastrous failure in their attempts to rescue the euro, throwing a lifeline to the weakest links in the eurozone by agreeing to shore up struggling banks directly, remove disadvantages for private creditors and move quickly towards a new supervisory regime for banks.
David Cameron said on Friday: “The countries of the eurozone did take some important steps forward last night. There’s still important work to do.”
Amid bad-tempered talks that continued through the night, Italy and Spain stunned the Germans by blocking progress on an overall deal at a two-day EU summit in Brussels until they obtained guarantees that the eurozone would act to cut the soaring costs of their borrowing.
The tough negotiations were deadlocked for hours, prompting the departure from the summit after midnight of the 10 non-euro countries, including Britain, leaving the eurozone leaders to fight it out.
After 14 hours of wrangling, they emerged with a three-point statement rewriting the rules for the eurozone’s new bailout regime in a way likely to soften the draconian terms that have accompanied the rescue programmes for Greece, Portugal, and Ireland over the past two years.
The leaders said a new eurozone banking supervisory system should be established by the end of the year. Once it is operational, the eurozone’s new permanent bailout fund, the European Stability Mechanism, would be able to recapitalise failing banks directly, without the loans going via governments as at present and adding to national debt burdens. The shift had been demanded particularly by Mariano Rajoy, the prime minister of Spain.
The new supervisory system is likely to come under the authority of the European Central Bank. Under plans being mooted, the new banking regime is to entail pooling eurozone liability for guaranteeing savers’ deposits and a common resolution fund for winding up bad banks. But the statement mentioned neither of these two points, which are controversial in Germany, which is reluctant to accept responsibility for the conduct of other countries.
The statement added that in drawing up the terms for up to €100bn (£80bn) for Spanish banks, private creditors would enjoy the same status as the bailout fund in the event of a debt rescheduling. Previously the fund enjoyed “seniority” over private investors.
Herman Van Rompuy, the European Council president who chaired the fractious summit, described the agreement as a breakthrough.
"We are opening possibilities for countries that are well-behaving to make use of financial stability instruments in order to reassure markets and get again some stability around some of the sovereign bonds of our member states," he said.
Pictured: German chancellor Angela Merkel arrives for day two of the summit in Brussels on Friday. Photograph: John Thys/AFP/Getty Images