* EU leaders agree legal framework to be completed this year
* ECB-led supervisor to oversee all 6,000 euro zone banks
* Day-to-day supervision of most to be delegated
* Little talk of Spain, Greece aid at summit
* Hollande: "The worst is behind us"
By Julien Toyer and Andreas Rinke
BRUSSELS, Oct 19 European Union leaders took a
big stride towards establishing a single banking supervisor for
the euro zone, agreeing it would enter into force next year,
opening the way for the bloc's rescue fund to inject capital
directly into ailing banks.
European Council President Herman Van Rompuy said the 27
leaders agreed at a Brussels summit to adopt a legal framework
by the end of this year giving the European Central Bank overall
responsibility for banking supervision.
"Once this is agreed, the single supervisory mechanism could
probably be effectively operational in the course of 2013," he
told a news conference after nearly 10 hours of talks.
French and EU officials said all 6,000 banks in the single
currency area would gradually come under ECB supervision by
2014, starting with banks receiving state aid, then large
cross-border institutions. Most day-to-day oversight would be
delegated to national bodies.
Creating an effective banking union, for which this deal was
a first step, is regarded by the International Monetary Fund and
market economists as a key component in overcoming the euro
zone's three-year-old debt crisis.
French President Francois Hollande said the leaders did not
discuss possible financial assistance for Spain, but he laid out
a series of steps that could turn a corner in the crisis.
"Tonight, I have the confirmation that the worst is behind
us," he told a 3 a.m. news conference.
"We are on track to solve the problems that for too long
have been paralysing the euro zone and made it vulnerable.
"If the December European summit confirms the decisions we
took, if Greece finds a lasting solution, if Spain recovers
funding mechanisms, then we will be done with a situation which
weighed on markets and on the confidence in the euro zone."
German Chancellor Angela Merkel said it would take more than
a couple of months before the supervisor was fully effective and
direct bank recapitalisation could be considered.
However, the agreement appeared to be a defeat for German
Finance Minister Wolfgang Schaeuble's efforts to delay and limit
the scope of European banking supervision.
Germany has been reluctant to see its politically sensitive
savings and cooperative banks come under outside supervision. It
rejects any joint deposit guarantee under which richer countries
might have to underwrite banks in poorer states.
The deal came after the leaders of France and Germany,
Europe's central powers, held a private meeting after clashing
in public over greater EU control of national budgets.
The point when the ECB will effectively become the bloc's
banking supervisor is important because it would open the way
for the euro zone's bailout fund to inject capital directly into
troubled banks, without adding to their host governments' debts.
A French government source said the European Stability
Mechanism (ESM) could start recapitalising troubled banks as
early as the first quarter of 2013, but a German source said it
was "very unlikely" to happen so soon.
Merkel earlier demanded stronger authority for the executive
European Commission to veto national budgets that breach EU
rules. She said a December EU summit would take decisions on
these issues of closer euro zone economic governance.
For once, the summit was not under intense pressure from
financial markets, which have calmed since the ECB pledged last
month to intervene decisively if needed to buy bonds of troubled
euro zone states to preserve the euro.
The EU leaders issued a statement welcoming Greece's
progress towards an agreement with its lenders and saying good
progress had been made in putting the bailout back on track.
In Athens, police clashed with protesters hurling stones and
petrol bombs during a general strike that brought much of the
near-bankrupt country to a standstill.
Merkel also advocated the creation of a European fund to
invest in specific projects in member states which she said
could be fuelled by a financial transaction tax which 11 euro
zone countries have said they will adopt.
Her call echoed a proposal for the 17-member euro zone to
have its own budget -- known in EU jargon as a "fiscal capacity"
-- on top of the 27-nation union's common budget, which mostly
funds agriculture and aid to poorer regions.
Several states, including the Netherlands, Finland and
Austria, were uneasy at the idea but none rejected it outright.
Since the ECB said last month it was ready to buy the bonds
of struggling euro zone states in unlimited amounts, state
borrowing costs have fallen sharply, easing the immediate
pressure for Spain to seek a bailout.
Spain's 10-year bond yields sank to their lowest since
February at an auction on Thursday, helped by Moody's decision
this week to leave its credit rating at investment grade.
But rather than signalling that Madrid does not need help,
Moody's verdict was predicated on Spain soon applying for a euro
zone assistance programme to trigger ECB intervention.
Italy raised a bumper 18 billion euros from a four-year
inflation-linked retail bond -- the most ever raised in a single
debt offering in European markets -- reducing its need to issue
debt before the end of this year.
On the banking union, much work remains to be done and the
deeper the discussion union goes, the more complex and
problematic it will get.
Countries outside the euro zone -- particularly Britain,
which has Europe's biggest banking sector -- are concerned their
banks could be disadvantaged if a balance is not maintained
between the ECB and its oversight of euro zone banks and the
powers of other authorities to oversee non-euro zone banks.
And if non-euro zone countries such as Poland join the
banking union, as policymakers are hoping, it is unclear what
representation they would have within the ECB, since the central
bank is currently answerable only to euro zone member states.