"Seismic shift" in EU policy following latest summit, & a better deal for Ireland

Taoiseach says EU deal will ease Ireland's debt burden

ÉANNA Ó CAOLLAÍ

Fri, Jun 29, 2012

Taoiseach Enda Kenny has said a European Union agreement reached in Brussels in the early hours of this morning to bring down borrowing costs for indebted countries will reduce the debt burden on Ireland's taxpayers.

Responding to pleas from Irish, Spanish and Italian leaders, the midnight summit of the 17-member currency area agreed that euro area rescue funds could be used to stabilise bond markets without forcing countries that comply with EU budget rules to adopt extra austerity measures or economic reforms.

In addition to reducing costs, the deal reached at the Brussels meeting will create a single supervisory body for euro zone banks by the end of this year, a first step towards a European banking union.

Mr Kenny said the agreement represented a "seismic shift" in European policy and should open the way to "re-engineer the debt burden on our taxpayers".

“What was deemed to be unachievable has now become a reality and that principle has been established and decided and agreed upon by the council, by the heads of government,” he said in Brussels. “But for us the more immediate impact is that Ireland is named as getting equal treatment as other countries with difficulties here. “That means that heads of government’s decision will now be referred to the eurogroup for an analysis of how best this might be used in Ireland’s case to re-engineer the debt burden that is on our taxpayer, which is what we set out to do.”




Tánaiste Eamon Gilmore described last night’s deal as a "major game changer" for Ireland that will ease its path back to financial markets. "When the details are worked out between July and the end of the year, it will have a real impact on our debt level and will greatly improve our ability to get back into the market and not to need a second bailout," he told RTE’s Morning Ireland.

The agreement in Brussels by the leaders of the 17 euro zone countries came in the early hours of the morning after German chancellor Angela Merkel appeared finally to relent in the face of concerted pressure. Dr Merkel had come to Brussels insisting that there would be no short term fixes on the table.

However Spanish prime minister Mariano Rajoy and Italy’s Mario Monti made clear that they would block further progress at the unless they received assistance to curb their soaring borrowing costs. Crucially, they appeared to have been backed by French president Francois Hollande, attending his first EU summit, who has said tough austerity measures to cut deficits must be backed by support for growth.

The deal was announced at 4.30am by European Council president Herman van Rompuy after David Cameron and the leaders of the other nine non-euro zone members had left the summit, leaving the remainder to work out a deal.

“We are opening the possibilities for countries that are well-behaving to make use of financial stability instruments ... in order to reassure markets and get again some stability around some of the sovereign bonds of our member states,” Mr van Rompuy said.

He said that they had also agreed the establishment of a joint banking supervisory body for the euro zone.

A statement issued after the agrement was reached said it was "imperative" to break "the vicious circle" between banks and sovereigns. It said that once an "effective single supervisory mechanism is established" that the ESM could recapitalise banks directly. "This would rely on appropriate conditionality, including compliance with state aid rules, which should be institution-specific, sector-specific or economy-wide and would be formalised in a memorandum of understanding," the statement said.

"The Eurogroup will examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme," it added.

"The process was tough, the outcome was good," Mr Monti told reporters, adding that Italy did not intend "at this time" to apply for the emergency support.

Countries that requested bond support from the rescue fund would have to sign a memorandum of understanding setting out their existing policy commitments and agreeing a timetable. But they would not face the intrusive oversight of a "troika" of international lenders to which Greece, Ireland and Portugal have been subjected, Mr Monti said.

Spain and Italy had earlier withheld their agreement to a €120 billion growth package at a European Union summit to demand emergency action to bring down their spiralling borrowing costs, which threaten to force the third and fourth largest economies in the euro zone out of the capital markets.

The euro soared 1.25 per cent to $1.2595 on the deal, having earlier hit a high of $1.2628, some way above its low of $1.2407 touched yesterday.

Whether investors regard the deal struck at the 20th summit since the crisis erupted in early 2010 as sufficient remains to be seen. Previous relief rallies have fizzled within days or hours as new doubts set in.

Euro zone leaders will return later today to discuss longer-term plans to build a much closer fiscal and banking union, on which they asked Mr Van Rompuy and the heads of the European Commission, ECB and Eurogroup finance ministers to present detailed proposals by October.

Spain formally applied for up to €100 billion in assistance this week to recapitalise banks laden with bad debts due to a similar burst housing bubble. Cyprus became the fifth country out of 17 euro zone members to appeal for a rescue due to the east Mediterranean island's heavy exposure to Greece's debt crisis.

As the leaders argued, Italy beat Germany 2-1 in the Euro 2012 soccer semi-final, the underdog knocking the favourite out of the contest.

Asked whether he expected Italy to go on to beat Spain in Sunday's final, Mr Monti deadpanned: "I never speculate about financial markets or football."