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Friday, Jun 29, 2012 1:45 PM UTC

‘Breakthrough’ as euro zone agrees to directly recapitalize banks

European leaders have agreed to use euro zone bailout funds to directly recapitalize struggling banks

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Topics: GlobalPost, Europe, European Financial Crisis, International relations, Germany,

'Breakthrough' as euro zone agrees to directly recapitalize banksGerman Chancellor Angela Merkel gesticulates during her speech at the regional conference of her conservative party, in Darmstadt, central Germany, Saturday, June 16, 2012. German Chancellor Angela Merkel said Saturday she hopes Greeks will elect a new government that stands by the country's promises to international creditors, insisting that Europeans have to stop making commitments which they then ignore. Greeks vote Sunday for the second time in six weeks amid fears the country could be forced out of the euro if they reject strict austerity measures and structural reforms demanded in return for rescue loans by other European countries and the International Monetary Fund. Germany, Europe's biggest economy, has been a key advocate of that approach. (AP Photo/Mario Vedder) (Credit: AP)
This article originally appeared on GlobalPost.

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

Global Post

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

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.”

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.

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