EU rescue funds to directly help banks from next year

The European Financial Stability Fund and the Euro Stabilization Mechanism, the financial rescue funds of the European Union, will directly provide funds to banks in eurozone member countries from next year.

The two funds had been required to provide capital to banks only through the governments of member states, which led to a hike in national debts.

Spain, Italy and other eurozone countries claimed that financial bailout funds supplied through governments also elevate the debt ratio of the countries concerned, thus raising interest rates on their government bonds, and hence have been hardly effective in stabilizing the market. Such direct funding, however, will begin only after an effective “unified bank oversight facility” is implemented by year’s end.

After concluding the first day of their meeting in Brussels Friday, EU leaders said in a statement, “The financial stability funds will be used more flexibly to give investors confidence and stabilize government bonds of member states.”

EU President Herman Van Rompuy said, “A breakthrough has been prepared to enable banks to get injection of capital directly (from the two funds).”

Italian Prime Minister Mario Monte welcomed the decision, saying, “It is a very important decision for the future of Europe and the eurozone.”

European media organizations said, “The (Euro Stabilization Mechanism’s) direct provision of funds represents German Chancellor Angela Merkel’s acceptance of repeated requests by France, Spain and Italy."

Additionally, EU leaders agreed on an economic stimulus package worth 120 billion euros (150 billion U.S. dollars), or 1 percent of the eurozone’s GDP. Reuters described the agreement as a "growth treaty."

Following the announcement, European stock markets got off to a strong start en masse. After opening, most major European stocks soared, with shares gaining 3.04 percent in France, 3.16 percent in Italy, 4.21 percent in Spain, 2.6 percent in Germany, and 4.3 percent in Greece.

taylor55@donga.com