Markets soared around the world this morning after a surprise announcement that the EU will use its bailout fund to give money directly to failing banks instead of forcing governments to accept bailout conditions for the money. It is the first time a change of strategy has actually been agreed, prompted in part by the growing scale of the financial meltdown in southern Europe.
The Spanish and Italians were reportedly ruthless in their negotiations, threatening to block ‘everything’ until something was done to bring down their borrowing costs. It makes sense, considering many were genuinely fearful that borrowing would become so expensive for the two countries, and bailout terms so stringent, that they would be unable to keep their financial sector afloat. For example, Spain’s 10-year bond yields have spent a lot of time topping the psychologically important 7% mark over the last few weeks, touching record highs and fuelling speculation that it would not be long before the government simply could not borrow any more.
But even in the early hours last night, their rumbustiousness looked as though it may bring the talks off the rails. David Cameron left the talks at around 1am, whilst other leaders continued to debate. Against this backdrop many were flabbergasted when EU president Herman van Rompuy hailed the surprise deal as ‘a commitment to the irreversibility of the euro’. If it’s so permanent, we’d better hope they’ve got it right!
But the saga is certain to continue, as the fix will only mean that the indebted banks will not be allowed to collapse completely. It will not eradicate the vast debts that are the root of the crisis – and cheap credit so that the two countries can continue to live beyond their means is certain to fuel further difficulties. Furthermore, Angela Merkel has repeatedly warned (and reiterated today) that there is no magic formula for solving the crisis.
But with this new measure, let’s hope the continent’s banks can stay afloat until the next crunch talks…