Markets rise as EU leaders clinch deal

They also pledged to create a single banking supervisor for eurozone banks based around the European Central Bank (ECB) in a landmark first step toward a European banking union that could help shore up struggling member Spain.

“It is a first step to break the vicious circle between banks and sovereigns,” European Council President Herman Van Rompuy told a final news conference after talks which stretched right through the night.

The deal was widely seen as a political victory for embattled Italian Premier Mario Monti and his Spanish counterpart, Mariano Rajoy, over German Chancellor Angela Merkel, who had brushed aside any need for such emergency measures earlier this week.

ECB President Mario Draghi endorsed the “tangible results,” which sent the euro sharply higher and cut Spanish and Italian bond yields. European shares rose, led by banking stocks buoyed by the prospect of moves to backstop the financial system.

Most economists polled by Reuters expect the ECB to cut borrowing costs at its July 5 meeting, which takes place against a darkening economic backdrop. But internal resistance to the central bank reviving its bond-buying program remains high.

After 14 hours of intense talks that ended at 4:30 a.m. (0230 GMT), the 17 leaders agreed on a series of short-term steps to shore up their monetary union and bring down the borrowing costs of Spain and Italy, seen as too big to bail out.

To that end the eurozone's temporary EFSF and permanent European Stability Mechanism (ESM) rescue funds will be used “in a flexible and efficient manner in order to stabilize markets” to support countries that comply with EU budget policy recommendations, a joint statement said.

It gave few specifics, but eurozone officials said the funds could buy bonds on both the primary and secondary markets on the basis of a memorandum of understanding signed with the requesting state and up to a funding limit to be agreed.

Both Italy and Spain said they did not intend to call on that mechanism to stabilize markets for now, hoping the Brussels agreement will serve as a sufficient deterrent.

“They took important steps forward last night,” said British Prime Minister David Cameron on arriving for the final round of a two-day summit crucial to the future of the embattled currency.

Merkel said “we realized something important, but we remained faithful to our principles: no offers without something in exchange.”

Her freshly elected French counterpart Francois Hollande, attending his first full summit, welcomed market response, saying “initial announcements have already had positive effects.”

The accord paves the way for the eurozone's 500-billion-euro (US$630 billion) bailout fund to recapitalize ailing banks directly, without passing through national budgets and thus adding to struggling countries' debt mountains.

This however, would occur only after a eurozone-wide banking supervisory body is set up, with leaders aiming for this to happen at the end of the year.

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