EU deal for Spain, Italy buoys markets but details sketchy

Fri Jun 29, 2012 4:49pm EDT
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By Ilona Wissenbach and Luke Baker

BRUSSELS (Reuters) - Under pressure to prevent a catastrophic breakup of their single currency, euro zone leaders agreed on Friday to let their rescue fund inject aid directly into stricken banks from next year and intervene on bond markets to support troubled member states.

They also pledged to create a single banking supervisor for euro zone banks based around the European Central Bank in a landmark first step towards a European banking union that could help shore up struggling member Spain.

"It is a first step to break the vicious circle between banks and sovereigns," European Council President Herman Van Rompuy told a final news conference after talks which stretched right through the night.

The deal was widely seen as a political victory for embattled Italian Prime Minister Mario Monti and his Spanish counterpart, Mariano Rajoy, over German Chancellor Angela Merkel, who had brushed aside any need for such emergency measures earlier this week.

ECB President Mario Draghi endorsed the "tangible results", which sent the euro nearly 2 percent higher and sharply cut Spanish and Italian bond yields. European shares rose, led by banking stocks buoyed by the prospect of moves to backstop the financial system.

"I am actually quite pleased with the outcome of the European Council. It showed the long-term commitment to the euro by all member states of the euro area," Draghi told reporters.

Market participants welcomed the outcome as a substantial step to restore confidence in the 17-nation euro zone, which was saluted by a more durable rally than previous summit outcomes.

"It's inching closer to a banking union, and the closer we get to a banking union would put (the EU) well on the road to a fiscal union," said Art Hogan, managing director of Lazard Capital Markets in New York.   Continued...

European Council President Herman Van Rompuy addresses a news conference after a European Union leaders summit in Brussels June 29, 2012. REUTERS/Francois Lenoir