European Union leaders surprised and impressed markets worldwide Friday by taking unexpectedly decisive action to boost confidence in the struggling euro common currency at a summit where little had been expected except impasse and discord.
At the urging of heavily indebted Spain and Italy, the presidents and prime ministers of the 27 EU nations agreed to let the European Central Bank use its surplus cash to recapitalize insolvent Spanish banks and to buy Spanish and Italian government bonds at interest rates vastly more affordable for those two nations, officials told reporters in Brussels after their two-day meeting.
The moves were expected to spare Italy and Spain from paying such high costs to borrow money that they would have to seek bailouts for their national treasuries, a prospect that would likely overwhelm the EU's emergency rescue funds. They are the third- and fourth-largest economies in the 17-nation Eurozone, which shares the euro currency.
Markets throughout Europe rallied on the news, with the euro gaining 2% against the U.S. dollar and stock markets in Spain and Italy both posting about 5% gains. The cost of borrowing also dropped significantly for the two countries, in a sign that lenders' worries have been at least temporarily eased.
After a working dinner Thursday night where the leaders had agreed to a token $149-billion spending package to spur growth in the recession-plagued region, Spanish Prime Minister Mariano Rajoy and his Italian counterpart, Mario Monti, insisted the group work through the night to come up with bolder steps that would convince dubious financial markets that euro nations' debts would be honored.
Investors, nervous about the possibilities of defaults, had driven up interest rates on Italian and Spanish bonds to 6% and 7%, respectively, rates that both countries warned were unsustainable.
German Chancellor Angela Merkel had resisted calls for direct European Central Bank lending to Eurozone member banks before more centralized controls were in place, and that position led to low expectations that the Brussels summit would act to ease the debt burdens of other euro users.
French President Francois Hollande claimed to have played mediator during the eleventh-hour talks, pressing Germany to agree to the ECB investments sought by Italy and Spain as the surest way to calm nervous financial markets.
At a news conference concluding the gathering, European Commission President Jose Manuel Barroso alluded to the broad skepticism that preceded the summit and boasted of its surprise delivery of "a robust set of answers which should significantly strengthen confidence in Europe's financial stability," according to a text of his comments posted on the EU website.
“I think the elements we put together will reassure the markets,” said Luxembourg Prime Minister Jean-Claude Juncker, who heads the Eurozone finance group.
ECB chief Mario Draghi also expressed confidence -- and a little surprise -- that the EU leaders' commitment to closer economic integration showed long-term commitment to the common currency and "tangible results" for dealing with the immediate threats to euro stability.
-- Carol J. Williams in Los Angeles
Photo: French President Francois Hollande lays out the moves agreed to by European partners at a two-day summit. Credit: Bertrand Langlois / AFP/GettyImages