New York, June 30 (FinanceEnquiry.com) – Dark clouds looming over Europe’s horizon seem to have dispersed, at least for the time being. European leaders on Thursday for the first time in many months did not just meet for the sole purpose of agreeing to disagree on everything. Under severe pressure to prevent the collapse of the single currency bloc that would have sent the entire global economy in a tailspin, European leaders on Friday moved a step closer to solving its 30-month-long debt crisis by agreeing to make use of euro zone’s bailout funds to inject liquidity directly in the stricken bank.
They also forwarded proposal for the formation of a single banking supervisory mechanism, a move that is most likely to shore up ‘teetering on the edge’ banks of Spain, that took a bath by investing heavily in a now burst property bubble.
‘It is a first step to break the vicious circle between banks and sovereigns,’ European Council President Herman Van Rompuy told in a final news conference after the lengthy talks.
The deal is being seen as a victory of sorts for the duo of Spanish PM Mariano Rajoy and his Italian counterpart Mario Monti. It is also being seen as a setback for Chancellor Angela Merkel, who a day before the conference has set aside Italy and Spain’s anguished cries of help by firmly putting to rest any hope of mutualised debt (intervention of member countries in the bond market of a troubled nation). She was quoted as saying, ‘I don’t see total debt liability as long as I live and out rightly rejected the idea of euro bonds by terming it as ‘economically wrong and counterproductive’.’
Spanish Prime Minister Mariano Rajoy, speaking in Spanish parliament before the two-day high stake summit had expressed Spain’s inability to keep funding itself for long given the rapidly rising rates on bonds and towering government deficit. Italian Prime Minister Mario Monti had said he will not rubber stamp any proposals without going into its full merit.
The breakthrough helped shore up market sentiments with both The S&P 500 and the Nasdaq posting their best daily percentage gains since December. Euro traded 2 percent higher while yields on both Spanish and Italian bonds fell.
‘The next question is whether the ESM/EFSF will have enough capital and assuming they don’t, will the ECB chip in by giving it a bank license, thus leveraging its size. That is yet to be determined,’ said Peter Boockvar, equity strategist at Miller Tabak & Co in New York.
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