European Debt Crisis

Euro summit ends with two key agreements

Stephen Beard Jun 29, 2012
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European Debt Crisis

Euro summit ends with two key agreements

Stephen Beard Jun 29, 2012
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Jeff Horwich: A summit of European leaders has yielded agreement on two key points. First, the EU as a whole will lend directly to banks wherever they get into trouble. Second, there’s going to be a new agency to supervise banks across the continent.

Our London bureau chief Stephen Beard is here live. Hello, Stephen.

Stephen Beard: Hello Jeff.

Horwich: So the status quo right now, when banks get underwater in say, Spain, is for the EU to give bailout money to Spain, which then bails out its banks. How is this going to change, and why is that such a big deal?

Beard: Right. Well, the bailout fund is going to be allowed to pump money directly into the banks, not, as you say, give to the governments. Because when they lent to the governments, those loans increased the governments’ debt, which hit the value of its existing bonds — which are largely owned by the banks, making the bank situation more difficult. And then the governments have to  borrow more money to help the banks. So the idea is: break the vicious circle; you lend the money directly to the banks. And that should help Spain.

Horwich: The other big part of this deal is a new supervisor of sorts for banks across Europe. What’s the hope there?

Beard: Well this is Germany’s quid pro quo: it wants a Europe-wide bank supervisor so there is some central control over what these banks are up to — essentially so the Germans can watch what the banks are doing with their money and make sure it isn’t being wasted away.

Horwich: So this deal fixes everything then, does it?

Beard: No. Nobody believes this is the end of the crisis, not by a long shot. Some analysts, however, believe that it is another small step down the road to an ultimate solution of the crisis that’s engulfed the southern, peripheral countries — Greece, Italy, Spain, Portugal.

Here’s Holger Schmieding of the German bank Berenburg :

Holger Schmieding: The countries on the eurozone periphery have been set on a diet to get slim and fit. And you don’t achieve the result of a diet in a day. The countries need to be kept on their best behavior for quite a while.

Diets can be painful, he says, but they don’t go on forever.

Horwich: Stephen Beard in London, thank you.

Beard: OK Jeff.

 

 

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