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Jun 29th 2012, 11:16 by Charlemagne | BRUSSELS
AFTER yet another late-night summit, filled with threats and bluffs, Europe s
leaders for once exceeded expectations. Just before dawn, they staggered out to
announce they had agreed (statement is here) that the euro zone s rescue funds
could directly recapitalise troubled banks.
The decisions heralds the start of a euro-zone banking union and marks the
first step in trying to end the dance of death in which weak sovereigns and
weak banks progressively stifle each other especially in Spain. Not for the
first time, markets rejoiced on the news, even though much of the detail
remains to be settled.
Before banks can be recapitalised directly, the euro zone will have to create a
strong central supervisor, centred on the European Central Bank (ECB). This
will take time, with several thorny problems to settle not least the question
of which banks should be supervised. Germany has tried to limit scrutiny to big
cross-border banks. But in Spain, and probably in Germany too, the worst
problems lie in smaller regional banks. Another issue will be the relationship
with banks and supervisors in non-euro countries, such as Britain (which does
not want to join the euro) and eastern European members (many of whom are
committed eventually to adopting the single currency).
So the new system may not be immediately applicable to Spain, which has put in
a request for 100 billion of loans from the temporary rescue fund, the
European Financial Stability Facility (EFSF) to recapitalise its banks. For now
the loan will add to Spain s debt burden. But European officials say that once
the supervision system is up and running, the permanent rescue fund, known as
the European Stability Mechanism (ESM) could assume the burden back from Spain.
The new arrangement may eventually be of assistance to Ireland, which is
saddled with the debts of its collapsed banking sector.
Another gesture of reassurance to markets is the commitment that the debt owed
by Spain to the EFSF, if and when it is transferred to the ESM, will not gain
seniority. The prospect had spooked private investors, who feared subordination
if the official sector became involved. When Greek debt was restructured
earlier this year, bonds held by the ECB were not subjected to losses.
These decisions mark a real concession by Angela Merkel, the German chancellor,
who had drawn the line at assuming other countries liabilities until more
progress was made toward political union. This may complicate the ratification
in the Bundestag of the treaty establishing the ESM.
It is also a victory for Mariano Rajoy, the Spanish prime minister who, along
with Italy s Mario Monti, had threatened to block any agreement at the summit
unless their demands were met. Mr Rajoy obtained satisfaction, but the same is
not quite true of Mr Monti, who had been the most adamant of the two.
The technocratic Italian prime minister had wanted a semi-automatic system for
the rescue funds to buy the bonds of virtuous yet troubled states, such as
Italy and Spain, without placing the countries under Greece-like programme. Mr
Monti appears to have avoided the overt involvement of the dreaded troika of
the ECB, the IMF and the European Commission. But any country benefiting from
bond-buying will still have to sign a memorandum of understanding with the euro
zone, and comply with a raft of existing conditions monitored by the European
Commission.
Mr Monti declared himself satisfied, but caused considerable irritation to
partners. Among the deals he had blocked was the "growth pact", a mixture of
stimulus measures. "Who needs the growth pact? Not Germany," said one bemused
participant. The euro zone s fiscal hawks say the bond-buying mechanism will be
little different from the existing system. Mario Monti raised a gun to his
head and threatened to shoot himself. In the end he wounded himself in the
shoulder, said one scornful diplomat.