Leaders in Brussels divided over how to interpret summit accord aimed at easing pressure on highly indebted states
Eurozone leaders are meeting in Brussels to try to build on a "breakthrough" summit 10 days ago that agreed to ease the pressure on highly indebted states by injecting rescue funds directly into troubled banks.
But the meeting has been plagued by divisions over how to interpret the summit accord and how the decisions should be implemented.
The Spanish banking rescue was the main issue confronting ministers on Monday, but there were mixed signals over who would be liable for the mooted direct recapitalisation of the country's financial sector.
The summit resolved to break the invidious link between failing banks and weak sovereigns by agreeing to use eurozone bailout funds to recapitalise banks directly, not via governments, to avoid pushing up debt levels. But since the summit, eurozone creditor governments have backtracked on the pledges over how the accord will be implemented.
While the Germans and other north Europeans insist that direct bank injections can be contemplated only once a new regime of banking supervision is in place (likely to take a year), senior Eurogroup officials signalled that even in the event of bailout funds going straight to banks, the host country would still be burdened. If the main bailout fund, the European Stability Mechanism, took equity in troubled banks, the host government would need to underwrite the risk and be liable if the bank went bust, the officials said.
"The ESM is able to take an equity share in a bank, but only against full sovereign guarantees. It remains the risk of the sovereign. There's some degree of mystification going on here," said a senior official.
That was contradicted by the European commission, which stressed there would be no liability for the host state if its banks were rescued.
With the troika of the commission, the European Central Bank and the International Monetary Fund scrutinising the performance of Greece, Cyprus and Spain, the senior official added that it would be the end of August before any decisions were taken on Greece and Cyprus.
Spain was expected to dominate Monday night's session, the quandary made more urgent as the yield on Madrid's benchmark 10-year bonds nudged 7.2%, past the point of the affordable.
The ministers were to try to reach a "political understanding" on a memorandum between the eurozone and Madrid to be finalised later this month. In Brussels there is talk of emergency Eurogroup talks around 20 July or an extraordinary summit. Ministers could also confer by videoconference before the August holiday.
In what appeared to be a reference to Spain, Draghi said last week that bailout funds to banks would burden the host country only temporarily since the money would come off the books once the new banking supervisory regime was in place. Eurogroup officials, however, cast doubt on whether Spain would benefit, pointing out that the memorandum of understanding with Madrid was likely to extend only until 2014 and it could take that long for the new procedures to be implemented.
On Greece, the officials said "there would be no more disbursement" of eurozone bailout funds until the current troika mission was complete and had assessed how far Athens' austerity and structural reform programmes had been blown off track by the political turbulence of the last three months.