World markets rally on euro-zone unity

Financial leaders meeting in Brussels agreed that its rescue funds could be used to stabilise bond markets without forcing additional austerity measures or economic reforms.

Financial markets in Europe, Asia and the United States yesterday rallied on the decision by euro-zone leaders to relax aid rules for shoring up banks and to create a single supervisory body that will oversee the bloc's stricken lenders.

The 17 leaders, who were meeting in Brussels for the 20th time since the financial crisis hit the single-currency bloc in 2010, agreed that its rescue funds could be used to stabilise bond markets without forcing countries that comply with European Union budget rules to adopt extra austerity measures or economic reforms.

However, the most crucial measure the leaders agreed on during their 14-hour meeting was the creation of a single supervisory body for euro-zone banks.

To come under the umbrella of the European Central Bank, the body will begin operations at the end of the year, which is much faster than previously expected.

David Kuo, the director of The Motley Fool, a London-based investing website, said the creation of the supervisory body would shift the responsibility of repaying debts to the banks.

“By allowing banks to borrow directly from the emergency funds, the responsibility for repaying the debts has shifted from the sovereign state onto the banks,” Mr Kuo said.

“Consequently, the single supervisory body is Germany’s only means to have adequate checks and balances on Europe’s banks.

“Addressing the banking problem is as crucial as addressing the structural deficit within the euro zone. The banks are key drivers of growth through the allocation of funds. But without funds readily at their disposal they can’t lend.”

Once it is operational, the euro zone’s future permanent bailout fund, the European Stability Mechanism, would be able to recapitalise banks directly without increasing a country’s budget deficit and without preferential seniority status, Reuters reported.

Markets in Europe rose sharp- ly on the news, with the Euro STOXX 50, comprising 50 Euro- pean blue-chip stocks, surging 4.96 per cent and Germany’s DAX Index soaring 4.33 per cent. Lon- don’s FTSE100 closed up 1.42 per cent.

In Asia, Hong Kong’s Hang Seng Index rose 2.19 per cent and Japan’s Nikkei ended the day up 1.5 per cent.

US markets also moved into positive territory, with the S&P500 up 2 per cent in early afternoon trading.

The measures represent a major concession by the German chancellor, Angela Merkel, who had insisted in the run-up to yesterday’s crunch summit that aid go directly to states and only under strict conditions.

But calls have steadily mounted on her to take a more flexible approach.

Both Italy and Spain are seen as “too big to fail”, giving the leaders of these countries, Mario Monti and Mariano Rajoy, added leverage in the talks.

Mr Monti and Mr Rajoy refused to sign off on a €120 billion (Dh553.6bn) growth package until Germany approved short-term measures to ease their cost of credit, delaying the talks by several hours.

Ireland hailed the decisions as a “game changer”. However, many of the details remain to be worked out and leaders appeared at odds over just how strict the conditions attached to any assistance should be.

“The summit result offers no ‘silver bullet’ to solve the euro crisis once and for all,” Holger Schmieding of Berenberg Bank said. “It is another attempt to buy some extra time for the underlying fiscal repair and structural reforms to show results. All in all, there is some progress.”

* With Reuters