Spain, Italy to receive bailouts from euro zone rescue funds
German chancellor Angela Merkel (L) arrives at the G20 Summit of Heads of State and Government in Los Cabos, Baja California, Mexico on June 18, 2012. The leaders of the world’s most powerful economies are confronted by turmoil in the eurozone, a critical election in Greece and worsening bloodshed in Syria.
European leaders, lead by German Chancellor Angela Merkel, reportedly reached an agreement late Tuesday night at the G20 summit to allow euro zone bailout funds to be used to buy up Spain and Italy's bonds, the Guardian reported.
The plan, proposed by Italy, would permit the temporary European Financial Stability Facility (EFSF), which currently has a lending power of about €350 billion, and the new European Stability Mechanism (ESM), which has €500 billion to purchase individual countries' bonds, something which Merkel had previously opposed, Reuters reported.
Though both the EFSF and the ESM have the ability to buy sovereign debt, only the European Central Bank (ECB) has actively been purchasing bonds from struggling euro zone countries, Reuters reported. Since May 2010, the ECB has bought 210 billion euros worth of debt, according to Reuters.
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The ECB's rules, however, forbid it from buying bonds first-hand, so its bond purchases don't affect the yield that governments pay, the Irish Journal reported.
"The idea is to stabilize borrowing costs, especially for countries who are complying with their reform goals, and this should be clearly separated from the idea of a bailout," Italian Prime Minister Mario Monti told a news conference in Los Cabos at the end of a G20 meeting.
Merkel has long opposed allowing the euro zone's rescue funds to lend directly to troubled countries, fearing that Berlin would end up responsible for the bill and that rescued countries would not adhere to the lending conditions, the Guardian reported. But Germany has come under intense pressure as Spain's economic crisis reaches dangerously unsustainable levels, according to the Guardian.
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"We will see what the euro zone announce in the next couple of weeks, but there is no doubt that they realize that individual measures in individual countries are by themselves not enough," Britain's economic Chancellor George Osborne said late Tuesday night, the Independent reported. "These are systemic problems which require a system answer."
A spokesman for Germany's government said Tuesday night that there had been "no change" in Berlin's position on the use of common funds for a euro zone bailout.