EU agrees to help Italy and Spain lower borrowing costs

Eurozone leaders have agreed to fund Spain’s banks directly rather than via the Europe Union’s bailout fund.

This means that the €100 billion loan that Spain will receive will not be counted as debt on the countries balance sheet and future bailouts will not add to government debt.

The concession happened after Spain and Italy blocked agreement on all other measures on the agenda until a deal had been agreed that will result in lower borrowing costs for the two countries in the short term.

The new way of funding will not happen immediately. It will only come into effect once the eurozone has set up a single banking supervisor that will be administered by the European Central Bank.

The markets welcomed the measures as the euro rose against the dollar by 1.3 per cent. Yields on Spanish and Italian bonds also fell sharply.

Spain and Italy were able to gain agreement, with the support of France, that countries which take loans from the eurozone bailout fund will not be subject to the strict monitoring measures on debt and budgets that Greece has been subjected to.

They will still have to adhere to their own individual agreements on debt and deficit reduction programmes and EU authorities will retain the ability to demand tighter deficit reduction deadlines.

The deal represents a significant concession by Germany. Over recent months German Chancellor, Angela Merkel has insisted that Germany would not agree to any short-term rescue packages.

However, by making this concession it means that the bailout fund, which is backed by taxpayers’ money will be taking a stake in failing banks. This increases German taxpayers’ liabilities and future risks.

EU leaders hope that the new measures will mean future bailouts to individual countries are not undermined by failing banks. By winning agreement for a single bank supervisor for all of Europe’s banks, the eurozone moves closer towards a banking union, something that Germany supports.

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