Euro leaders back emergency plan to save Spain and Italy
By Sarah Collins | Friday 29 June 2012
Eurozone leaders have said they are ready to enact an emergency plan to stem the market panic surrounding Italy and Spain, including allowing the eurozone’s future rescue fund to inject capital directly into banks and buy bonds on open markets. The aid, which leaders say is “imperative to break the vicious circle between banks and sovereigns,” is not being offered without conditions, the first being that a eurozone-wide banking supervisor - most likely the European Central Bank - will have to be in place before any of it can get off the ground. “These are quite ambitious decisions and that shows once again the commitment of the member states, namely those in the euro area, to the irreversibility of the euro and I think this will be recognised by all,” said Commission President José Manuel Barroso after a 14-hour meeting, on 29 June. The concessions were granted after Italy and Spain refused to sign up to a €120 billion growth pact unless they received assurances that they could tap access to the European Stability Mechanism (ESM), the eurozone’s future rescue fund, without facing stringent conditions.
However, German Chancellor Angela Merkel insisted that euro countries were not being granted a free ride. “We are completely sticking to our scheme: benefit, counter-benefit, conditionality and control. I think we have done something important but remained faithful to our philosophy: no benefit without counter-benefit,” she said.
Spanish Premier Mariano Rajoy said the deal was a “triumph of the euro,” while Irish Prime Minister Enda Kenny said it represented a “seismic shift in European policy”. “Before the meeting there certainly wasn’t any great evidence of concessions being given here,” Kenny said. “There was a great deal of concern and anxiety expressed by the leaders about the fact that if you didn’t do anything the situation was only going to get worse.”
Spain’s bank bailout of up to €100 billion, agreed in principle on 9 June, will be funnelled through the sovereign until the ESM is up and running, when it will transfer to the ESM and the debt “rapidly taken off the balance sheet of the Spanish sovereign,” a senior eurozone official said. The move alleviates market jitters that the Spanish loan would only add to the country’s woes by pushing its debt and borrowing costs up. A second concession will see the ESM renounce its claim to seniority over other Spanish loans, another issue that had been spooking investors. Spain will now have to negotiate a memorandum of understanding on the deal, which Rajoy insisted will not have “any type of macroeconomic condition” attached, a sensitive issue for Spain, which does not want to face regular monitoring by an EU-IMF troika and stringent economic targets as is the case in Greece, Ireland and Portugal.
A second concession agreed to placate Italian Premier Mario Monti is to use the ESM or the existing European Financial Stability Facility “in a flexible and efficient manner in order to stabilise markets” - meaning buying the bonds of stressed states in the primary (where bonds are issued) or secondary markets (where bonds are openly traded). To qualify for a programme, member states have to stick to debt and deficit targets under the Stability and Growth Pact, continue reforms agreed under a parallel monitoring system for economic imbalances and sign a memorandum of understanding with the EU committing to the targets. Italy is not mentioned specifically in the statement, Monti said, because it “does not intend for the moment to benefit”. French President Francois Hollande said that the very promise of bond buying might serve to buoy markets. “If the announcement itself lowers the interest rate, why seek it?” Monti has not ruled out tapping the fund.
A separate clause in the statement refers to examining “the situation of the Irish financial sector with the view of further improving the sustainability of a well-performing adjustment programme”. The sentence is a veiled reference to Ireland’s bid to reduce the cost to the state of the massive bailout of its banking sector in 2009.
The declaration is available at
www.europolitics.info > Search = 317551
To qualify for a programme, member states have to stick to debt and deficit targets under the Stability and Growth Pact