Germany forfeits to Spain and Italy, agreeing to loan directly to banks

by Andrés Cala  |  published on June 29, 2012

Germany ceded a victory to its southern neighbors Spain and Italy today – not in a football stadium, but in a make-or-break summit in Brussels as European leaders reached a landmark deal to stave off what many feared would be the beginning of the end of the common currency.

After days of closed-door and microphone diplomacy,German Chancellor Angela Merkel finally agreed to allow the 17-member eurozone’s bailout funds to be used to lend money directly to ailing banks, something she had ruled out only a day before.

Berlin‘s concession was made in exchange for moreEuropean Union oversight of banks and national budgets – a bank union, essentially. The agreement illustrates just how worried Europe – even Germany – is of a eurozone collapse.

It will allow countries like Spain to recapitalize their ailing financial sectors without computing the loans as a government burden, something that will act as a shortstop against climbing sovereign interest rates. It will also strengthen Europe’s good banks, especially in countries like Germany and the Netherlands, which have been dragged down by broader eurozone concerns.

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