Debt Crisis: Spain and Italy to Be Bailed Out in €750bn Deal

European leaders are ready to announce a £600 billion deal to bail out Spain and Italy, it emerged at the G20 summit on Tuesday night.

Speaking before the meeting, François Hollande, the French president, said: 'It’s not on growth. It will be more on mechanisms that allow us to fight speculation.' Photo: Patrick Rasenberg/Flickr

The deal is expected to be announced when the 27 European Union leaders meet for a summit in Brussels June 28-29 — a summit that will be “critical” to shoring up the eurozone’s single currency, U.S. Treasury Secretary Tim Geithner said Tuesday at the close of the G20 summit.

The move, which represents a substantial shift in policy for Germany’s chancellor, Angela Merkel, is supposed to send a strong signal to financial markets that Europe’s biggest economy is finally prepared to back its weaker neighbours.

“Nothing has been decided yet,” said a spokesman for Merkel as officials from other countries started talking about the pending deal for eurozone bailout funds to buy up the bonds of crisis-hit governments.

The communiqué issued at the end of the G20 summit, which finished in Mexico last night, said that European leaders had agreed to take measures to bring down borrowing rates.

Under the deal, the two European rescue funds — the permanent $634 billion European Stability Mechanism and its predecessor, the $317 billion European Financial Stability Facility — will buy bonds issued by Spain and Italy, UPI reported.

Money in these funds has beenpreviously used to bail out smaller European countries such as Greece, Portugal and Ireland.

French president François Hollande said Italy had proposed using the eurozone’s new permanent bailout fund to buy the debt of member states saddled with high borrowing costs and that this was an idea worth exploring.

“Italy has launched an idea which is worth looking at,” Hollande said. The proposale will be discussed at a meeting in Rome on Friday between him, Mrs Merkel, Spain’s Mariano Rajoy and Italy’s Mario Monti.

He added: “We are looking for ways to use the ESM for this. At the moment it is just an idea, not a decision. It is part of the discussion.”

Hollande also said that rates paid by Spain and Italy to borrow on debt markets were unacceptable. “We must show a much faster capacity for action,” he noted.

The Telegraph reports that the European Central Bank earlier bought about £170 billion (€210 billion) of bonds in this way but stopped last year.

The Bank hoped the new plan will drive down the cost of Spanish and Italian bonds by showing that the eurozone is prepared to stand behind the debts of its members.

George Osborne, the Chancellor, last night said that he was optimistic a deal could be agreed.

“We will see what the eurozone announce over the next couple of weeks, but there is no doubt that they realise that individual measures in individual countries – like recapitalising Spanish banks and getting a Greek government that is in favour of staying in the euro and doing what is necessary to stay in the euro — are not by themselves enough,” Osborne said.

“These are systemic problems in the eurozone which require a systemic answer and we need to see measures from the eurozone that help bring borrowing costs down, that help ensure that there are common resources transferred from richer countries to poorer countries, that the whole eurozone stands behind the banks of the eurozone,” he added.

Christine Lagarde, the managing director of the IMF, said: “These resources are being made available for crisis prevention and resolution and to meet the potential financing needs of all IMF members.”

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