June 29 - Euro zone leaders have agreed to take emergency action to bring down Italy's and Spain's spiralling borrowing costs and to create a single supervisory body for euro zone banks by the end of this year, a first step towards a European banking union. Joanna Partridge reports.
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They talked late into the night - and dawn brought agreement among euro zone leaders meeting in Brussels.
They will take emergency action to bring down Italy and Spain's borrowing costs, but without imposing any more austerity measures.
A bleary-eyed EU Council President told a 4.30am news conference the leaders will allow the permanent bailout fund to lend directly to banks, but without increasing countries' budget deficits.
SOUNDBITE: EU COUNCIL PRESIDENT, HERMAN VAN ROMPUY, SAYING (English):
"We agreed on something new which is a breakthrough that the banks can be recapitalised directly in certain circumstances and the biggest of the most important condition is that we have to put in place a single supervisory mechanism and second decision is that we are opening the possibilities to countries who are well behaving, that we are opening the possibilities to make use of financial stability instruments ESFS, ESM in order to reassure markets."
EU Commission President Jose Manuel Barroso stressed direct recapitalisation of banks would only take place under strict conditions.
SOUNDBITE: EU COMMISSION PRESIDENT, JOSE MANUEL BARROSO, SAYING (English):
"I think it is very ambitious decision that shows once again, the commitment of the member states namely those in euro area to the irreversibility of the euro and I think this will be recognised by all."
Italian Prime Minister Mario Monti said the process was tough, but he was pleased with the outcome.
He says that Italy isn't intending to apply for the emergency support at the moment - but the leaders' agreement should take the intense market pressure off Italy and Spain.
There was no euphoria from investors but Christian Schulz from Berenberg Bank says it is a step in the right direction.
SOUNDBITE: Christian Schulz, Senior Economist, Berenberg Bank, saying (English):
"It's a significant relief for Spain, it really fixes some of the problems which led to the relatively short lived positive reaction after Spain got its bailout. So Spain's got some good things. The ECB getting banking over side in the neartime future means that there will be more flexibility. The growth package is actually cosmetic. Ireland might be a little better off. So a lot of little positive results but probably not the big silver bullet that some of the markets had been hoping for."
The leaders appear to have bought some more time for now - but there are already questions over what conditions might be attached to loans to banks.
The agreement is also of special interest to already bailed out Ireland whose bad banks were its downfall.
They've called the move a "major game changer".
Joanna Partridge, Reuters
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