‘Breakthrough’ eurozone deal after German concessions

The “breakthrough”, announced by European Council president Herman van Rompuy, came after Italian prime minister Mario Monti and Spain’s Mariano Rajoy faced down Germany’s chancellor Angela Merkel in a tense summit showdown.

Under the deal EU countries that were following strict budget rules could still apply for bailouts that would not come with the stringent conditions that have accompanied previous emergency loans.

The leaders of the 17-nation eurozone have also agreed to a joint banking supervisory body.

Under previous rules, the bailout loan had to be made to the government, which would then lend it on to the banks.

Spooked

But having that debt on the government’s books spooked investors, who began demanding higher interest rates for lending money to the government.

In 2010 Ireland needed a bail-out after taking on the debts of its banks. The burden of this debt amounts to about 20 per cent of the country’s GDP. Following last night’s deal, which effectively changed the rules, Ireland’s political leaders are now looking for compensation from Europe for the financial hit they were forced to take two years ago.

The deal is intended to avoid a repetition of this scenario resulting in a bail-out to aid the much bigger Spanish economy.

The agreements in Brussels suggest Germany is willing to move on its tough stance on forcing reforms in exchange for rescue money and borrowing costs for struggling eurozone countries are likely to come down.

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Mrs Merkel had come to the summit determined to maintain her hardline position, insisting that there were no short-term fixes on the table.

But she was forced to relent after Mr Monti and Mr Rajoy – with the backing of French president Francois Hollande – made clear they would block any further progress at the summit if they did not receive assistance to curb their soaring borrowing rates.

The agreement finally came after UK prime minister David Cameron and the other nine non-eurozone leaders left the summit at around 1am, leaving the single currency bloc to thrash out their differences.

David Cameron welcomed the deal hammered out in the early hours of the morning, saying that the eurozone countries had taken “some important steps”.

Arriving for today’s final session, the prime minister said: “For a long time we have been saying that more action needs to be taken for short-term financial stability – more to recapitalise banks, to use firewalls to drive down bond spreads and interest rates to create greater stability.

Step forward

“I think they took some important steps forward last night and I very much applaud that. There is still important work to do and that is what we will be doing today.”

The FTSE 100 Index rose 78 points on the news – a 1.4 per cent increase – following the agreement in Brussels that struggling banks could have access to the EU’s bailout funds without adding to government debt.

In response, the yield on 10-year bonds in Italy and Spain fell to 4.5 per cent and 5.8 per cent respectively, away from the unsustainable 7 per cent mark which pushed Greece, Portugal and Ireland into taking a bailout.

Rebecca O’Keeffe, head of investment at Interactive Investor, said: “The jubilation with which the markets have greeted the agreement does appear to highlight how it is better to have low expectations for European summits. That way, you can at least be positively surprised.”

The summit had expected to focus on a 10-year road map for reform of the eurozone, setting out proposals for a banking union, fiscal union – and leading ultimately to political union.

A report fleshing out the details of the plan will now be delivered to the next EU summit in October.

“The aim is to make the euro an irreversible project,” Mr van Rompuy said.

EUROZONE SPECIAL REPORT