Insights: Eurozone: Summit to Break Banking/Sovereign Link?

Posted June 29, 2012 by Editor

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• Eurozone leaders at the EU Summit have taken major steps towards breaking fiscal and sovereign links. As a result, proposals for a single supervisory mechanism are in the works. Such a mechanism could be implemented as soon as the end of this year with the role of recapitalizing banks directly from the ESM.
• Moreover, the ECB will now be allowed to use existing EFSF/ESM instruments in a flexible and efficient manner to stabilize markets in peripheral countries.
• This move is clearly positive for Spain and Italy, as these nations will simply have to meet existing fiscal demands to receive bailout funding rather than acquiescing to Greek-style monitoring programs.
• Questions remain going forward. First, it is unclear whether the € 500 bln existing bail-out funds will be adequate to shore up periphery banks. Moreover, Germany seems to have relented on its austerity demands. But how long will this German deference last?

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