EU leaders concluded a first day of talks this morning and sent out a statement, subject to approval today.
They affirmed it was their imperative to break the vicious circle between banks and sovereigns. First of all, they affirmed that financial assistance for the recapitalization of the Spanish banking sector will be provided by the EFSF until the ESM becomes available. It will then be transferred to the ESM, without gaining seniority status, a welcome for private Spanish bondholders. Second, they ordered the EC to come up with proposals for the creation a single supervisory mechanism for the banking sector by the end of the year. Once this is established (involving the ECB), the ESM could, following a regularly decision, have the possibility to recapitalize banks directly.
This means that the bailout funds would then be swept off sovereign books. Banks crashes will no longer be the burden of national treasuries. As “similar cases will be treated equally”, this is good news for Ireland as well whose problems are in se similar to the Spanish ones. Finally, countries who want to use the EFSF/ESM rescue funds in a flexible and efficient manner (eg bond buying on secondary markets to lower yields), will no longer fall subject to extensive bailout programmes (such as Greece, Ireland and Portugal now). They do however need to stay in line with deficit/debt targets. The Eurogroup is tasked to implement the decisions above by July 9.
In the temporary statement, no word is mentioned about the growth pact or more fiscal union. Italian PM Monti (and to a lesser extent Spanish PM Rajoy) apparently blocked all topics on the agenda until short term measures the ease the tension on their bond markets were agreed. German Chancellor Merkel had to give in to demands as she for example needs the growth pact to get opposition support for her fiscal pact. Today, talks continue and leaders are expected to, amongst others, sign off on the €120B growth pact.