Europe summit surprises with bold moves

By Toby Sterling

Associated Press

Published: Friday, June 29 2012 12:00 a.m. MDT

The importance of recapitalizing banks directly from the bailout fund became evident this month when Spain was offered €100 billion ($125.6 billion) for its shaky banks. Previously the bailout loan would have to be made to the Spanish government, which would lend it on to the banks. The prospect of having that debt on the government's books spooked investors, who began demanding higher interest rates to reflect the risk of a Spanish default.

Lending the money directly to the banks avoids putting more debt on the government's books.

Analysts remain skeptical about whether the moves will be enough to fix Europe's debt crisis, especially as the amount of money available to help in the crisis — some €500 billion — is dwarfed by the amount of debt across the continent. Italy alone has outstanding debt of €2.4 trillion.

"These steps are the obvious ones to take to try to restore some confidence in the market in the short term," said Gary Jenkins, managing director of Swordfish Research in London. "Alone, they do not solve the underlying problems but they might buy a bit of time, which is probably about the best they can do right now."

European Central Bank President Mario Draghi, who is to be given additional powers to oversee the bailout funds by July 9, and to oversee big European banks by the end of the year, said he was "very pleased" with the result of the discussions.

Though welcoming the measures that were taken, analysts think more will have to be done.

"If the aim is to take to ease tensions on the Italian and Spanish bond market on a more sustainable basis, we probably will need to have more assurance on the fire power," said analyst Carsten Brzeski of ING in a note.

Brzeski said more liquidity support from the ECB "looks inevitable" and may come as soon as Monday.

As well as trying to fix the euro, the EU leaders also agreed to devote €120 billion in stimulus to encourage growth and create jobs, though half of it had already been earmarked and it includes only €10 billion in actual new commitments. France had pushed for the growth package, arguing that austerity measures are stifling growth and making things worse.

The 27 leaders of the EU agreed on "four building blocks" of a tighter union — but postponed specifics until a study due in October. The building blocks, which include sharing debt in the form of jointly issued Eurobonds, were laid out in a sweeping document presented by Van Rompuy and colleagues before the summit.

Van Rompuy said the report would be "a specific and time-bound roadmap for the achievement of a genuine economic and monetary union."

"The aim is to make the euro an irreversible project," he said.

He did not say, however, whether the general agreement on the tighter union included any commitment on eurobonds from Germany and other stronger economies that have firmly opposed sharing debt with more profligate countries such as Greece.

One key factor in the negotiations was that France's president Francois Hollande appeared to turn against Merkel and lobbied instead on behalf of the southern states frustrated at the failure of austerity measures to solve their problems.

"The best way to get other people to move is to move yourself," he said.

Germany and France have been the traditional drivers of European policy, but the Socialist Hollande and conservative Merkel differ over how to tackle this crisis.

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