EU Brussels Summit: eurozone agrees on bank recapitalization

EU leaders at Brussels summit have agreed to use the eurozone’s bailout fund to support struggling banks directly, without adding to government debt.

Speaking after 13 hours of talks in Brussels’, EU chief Herman van Rompuy also said a eurozone-wide supervisory body for banks would be created.

Officials said the plans could be finalized during July.

Analysts say Germany appears to have given ground after pressure from Spain and Italy to provide more support.

The two southern European countries had withheld support from an earlier plan to for a growth package worth 120 billion Euros ($149 billion).

They wanted measures to lower their borrowing costs.

Herman van Rompuy said the new proposals would break the “vicious circle” between banks and national governments.

Although Germany appears to have compromised, Chancellor Angela Merkel has managed to ensure that Brussels has more control over the finances of eurozone countries, something she had wanted.

The deal came about after new French President Francois Hollande appeared to throw his weight behind Italy and Spain.

“I’m here to try to find rapid solutions for those countries facing pressure from the market, despite having made huge efforts to balance their budgets,” the socialist French president said.

The new growth package, announced by Herman van Rompuy, is made up of:

• A 10 billion-euro boost of capital for the European Investment Bank, expected to raise overall lending capacity by 60 billion Euros

• Targeting 60 billion Euros of unused structural funds to help small enterprises and create youth employment

• A pilot launch of EU project bonds worth 4.5 billion Euros for infrastructure improvements, focusing on energy, transport and broadband.

In Brussels, both Italy and Spain were pushing the eurozone bloc to agree steps to reduce the interest rates the two countries have to pay.

Spanish 10-year government bonds were trading at yields above 6.9% on Thursday, coming close to the 7% considered unaffordable.

Spain’s Prime Minister Mariano Rajoy said debt sustainability was a pressing problem.

“We are paying rates that are too high to finance ourselves and there are many Spanish public institutions that cannot finance themselves.”

Spanish and Italian leaders are worried that their countries could soon – in effect – be shut out of international markets and forced to seek assistance.

Angela Merkel has warned there is no “magic formula” to solve the crisis.

Several EU leaders want individual countries’ debts guaranteed by the whole eurozone, for instance in the form of centrally issued eurobonds.

But Angela Merkel told the German parliament on Wednesday that eurobonds were “the wrong way” and “counter-productive”, adding: “We are working to breach the vicious circle of piling up debt and breaking [EU] rules.”

She said to loud applause: “Joint liability can only happen when sufficient controls are in place.”

Stronger competitiveness was the condition for sustained growth, the chancellor said.

Meanwhile, UK Prime Minister David Cameron said on his arrival at the summit that eurozone countries had some “hard decisions” to make.

When asked about plans for transferring more budgetary powers to the EU level, he said he shared “people’s concerns about Brussels getting too much power”.

European authorities have also unveiled proposals such as the creation of a European treasury, which would have powers over national budgets. The 10-year plan is designed to strengthen the eurozone and prevent future crises, but critics say it will not address current debt problems