Measures sought to help untangle euro

Decisions need to be made on banking supervision and how to use bailout money.

Spanish Prime Minister Mariano Rajoy. Picture: AFP.

BRUSSELS  - Euro zone finance chiefs will try to flesh out plans to reinforce the single currency on Monday but their talks in Brussels may do little more than highlight the limitations of last month's deal to help indebted states and banks.

Decisions on banking supervision, how to use euro zone bailout money, aid to Spain and Cyprus and whether to grant concessions to Greece are likely to take months to finalise, while pressure for action is growing.

Spanish and Italian borrowing costs moved back up near unsustainable levels on Friday as hopes raised by the summit began to fade. Leaders of both countries issued pleas at the weekend for rapid moves to implement the agreement.

"This is where the credibility of the entire European project is at play," Spanish Prime Minister Mariano Rajoy said.

The deal reached by leaders from the 17 nations sharing the euro aims to give the European Central Bank greater oversight of the bloc's banks and to use the euro zone's rescue funds to reduce countries' borrowing costs.

But critical elements were left vague, time frames may already be slipping and ministers could end up meeting again later in July to take firm decisions.

"This is very much the follow on from the summit, but it doesn't mean all details can be set down," said one euro zone diplomat briefed on the Brussels meeting that is due to start at 17:00 CET.

"The issue of ECB supervision is a complex, longer-term issue and not one that can be decided in a few hours."

ECB President Mario Draghi will testify to the European Parliament on Monday before ministers meet, and after cutting rates last week could signal more dramatic measures such as buying government bonds or flooding banks with fresh liquidity.

Germany, the bloc's biggest economy, as well as wealthy Finland and the Netherlands, are wary of what was announced at the summit and German Chancellor Angela Merkel is reluctant help its partners without strict conditions.

Central to the euro zone leaders' plan is to give the ECB a central role in supervising banks, which would then allow the permanent rescue fund - the European Stability Mechanism (ESM)- to recapitalise banks directly instead of via governments.

That is seen as a concession to Spain, which has requested a bailout of up to 100 billion euros for its banks, although it is not clear when Madrid will benefit.

Leaders want to break the link between banks and sovereigns by not lumbering governments with debts for rescuing their lenders, making it harder for them to borrow.

But the central question as to whether individual countries or the euro zone assumes liability for banks that are rescued by the ESM remains open.

Leaders agreed to remove the ESM's preferred creditor status when it lends to Spain, to calm investors who were worried they would not be repaid money they had already lent.

They also decided that the ESM and the euro zone's temporary bailout fund, the EFSF, can buy euro zone bonds at auction and in the open market to lower borrowing costs, with some conditions attached but without a full programme.

The ESM is due to start operating during the European summer, but at least for now, countries will need to provide guarantees in return for bank aid it gives, according to one euro zone official who is involved in preparing the Euro group.

That might help overcome German concerns about the ESM taking on this risk.

"There is some degree of mystification going on here ... in the broader public who think that under current rules the ESM could all of a sudden end up owning Bankia with the full risk of Bankia on the balance sheet of the ESM," he said, referring to the Spanish lender. "This is very much not the case."