Euro zone leaders agree to directly recapitalize banks


German Chancellor Angela Merkel talks with Italian Prime Minister Mario Monti after a meeting of European Union leaders in Brussels on June 28. EU leaders debate 'a big leap forward' to strengthen their union and save the euro at a two-day summit starting Thursday.


John Thys

European leaders meeting in Brussels have agreed to use euro zone bailout funds to directly recapitalize struggling banks, Reuters reported.

A decision was reached just before dawn on Friday, after 14 hours of marathon talks, with leaders agreeing to create a supervisory body for the euro zone's banks by the end of the year.

More from GlobalPost: Bailing out the euro zone’s bailout

European Council chairman Herman Van Rompuy said the move aimed to break the "vicious circle" between banks and governments, as it will enable lenders to receive a financial boost without adding to government debt.

Al Jazeera reported the decision marks a victory for Italy and Spain, which are facing spiraling borrowing costs – that risk forcing them out of the capital markets – adding that Germany had backed down somewhat on demanding that countries implement tough reforms in exchange for bailout funds.

Van Rompuy described the decision to directly recapitalize euro zone banks as a "breakthrough," while the German Chancellor Angela Merkel said she was "very satisfied that we took good decisions on growth."

More from GlobalPost: Banking on Africa's poor

While euro zone leaders agreed to begin implementing the decisions by July 9, the EU's existing bailout fund will continue to provide aid until the new fund, the European Stabilization Mechanism, begins operations, the BBC reported, adding that money may not be available until the end of the year.