European leaders are poised to announce a 750 billion euro deal to bailout beleaguered Spain and Italy by buying the countries’ debts.
Leaders of the world’s leading economies at the Pacific resort of Los Cabos, Mexico
Previously, money in these funds – which has been provided by members of the single currency – has been used to bailout smaller European countries such as Greece, Portugal and Ireland. Governments in these countries are offered money direct in return for agreeing to austerity programmes.
Under the new plan, the money in these funds will not be given directly to governments but will instead be used to buy up debts on the financial markets. The European Central Bank previously bought about 210 billion euros of bonds in this way but stopped last year.
It is hoped that 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.
Experts said it was a step towards establishing shared Eurobonds, where debt from across the single currency area is shared and effectively underwritten by Germany.
George Osborne, the Chancellor, indicated 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,” he 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: “The eurozone is inching towards solutions. Basically, we do need to see the richer countries, like Germany like Holland, spend some of their resource in propping up the weaker countries of the eurozone.
“Obviously it is difficult for them to do that, it is not a popular thing to do but it is absolutely necessary.
“I think there are signs that the eurozone are moving towards richer countries standing behind their banks and standing behind the weaker countries.”
The emergence of an outline rescue deal for Spain and Italy comes after Spanish bond yields increased sharply to more than seven per cent in the wake of the rerun of the Greek election last weekend.