EU Leaders Agreed on Bank Recapitalisation

EU leaders have agreed to use the euro zone’s planned bailout fund to directly support struggling banks, without adding to government debt and to also set up a joint banking supervisory body.

Spain and Italy put pressure on Germany to allow the bailout fund to buy government debt in the markets, a measure to lower the borrowing costs.

A previous agreement to lend money to Spain’s banks had not been clear about where the money would come from, and which lenders would have priority in the event of a default. According to this new deal, the EU’s existing bailout fund will provide the financial aid under its current rules until a new fund, the European Stabilisation Mechanism (ESM), begins to operate, as such these loans will not be given priority over private sector loans. This means that if Spain were to default, the official lenders would not get preferential treatment, helping make Spanish government debt a bit more attractive to private investors.

Euro zone leaders agreed to begin implementing the decisions by 9 July, however, it could take until the end of the year before the new money becomes available.

European authorities also unveiled proposals including the creation of a European treasury, which would have powers over national budgets.

Source: BBC

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