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Markets rise as EU leaders clinch deal

Stocks Rise

Stocks around the world surged Friday, with markets in countries on the front line of the crisis doing particularly well. Italy's FTSE MIB and Spain's IBEX indexes each rose 3 percent.

U.S. stocks surged on opening Friday. Later, the Nasdaq had risen by over 2 percent.

As of press time, the Dow Jones Industrial Average was up 223.87 points (1.78 percent) at 12,826.13.

The S&P 500 index gained 24.45 points (1.92 percent) to 1,354.49, while the tech-rich Nasdaq rose 67.17 (2.35 percent) to 2,916.82.

Perhaps more importantly, the yield on Spain's 10-year bond dropped by 0.32 percentage points to 6.58 percent. Italy's was down by 0.14 percentage points to 5.94 percent. Both countries have seen their rates edge toward the 7 percent level which is seen as unsustainable over the long term.

The importance of recapitalizing banks directly from the bailout fund became evident this month when Spain was offered 100 billion euros (US$125.6 billion) for its shaky banks. Previously the bailout loan would have to be made to the Spanish government, which would lend it on to the banks. The prospect of having that debt on the government's books spooked investors, who began demanding higher interest rates to reflect the risk of a Spanish default.

Waiving ESM Preferred Status

In a key concession by EU paymaster Germany, the leaders agreed to waive the ESM's preferred creditor status on lending for Spanish banks, removing a key deterrent to investors buying Spanish government bonds, who feared having to take the first losses in any debt restructuring.

“We have taken decisions that were unthinkable just some months ago,” European Commission President Jose Manuel Barroso said.

Despite the concessions by Berlin allowing eurozone rescue funds to be used more flexibly, questions remained about the conditions, size and supervision of any future aid for Spain and Italy.

Monti, determined to avoid the political stigma of the bailout terms imposed on Greece, Ireland and Portugal, said countries that complied with EU budget recommendations would not receive extra austerity conditions or be subject to intrusive inspections by a “troika” of international lenders.

Merkel, eager to minimize any concessions to avoid giving the impression back home that she had blinked first, said strict conditionality would still apply to the use of rescue funds and countries would face stringent monitoring by the EU Commission and the ECB.

“There was pressure here to find a solution and I saw my role as ensuring that these solutions should respect the procedures that we already know and have, and the guidelines given by the Bundestag,” she said.

The Spanish and Italian leaders threatened to block a package of measures to promote growth to pressure Merkel to accept measures to ease their borrowing costs, delaying the talks for hours.

Pan-EU Budget Authority Decision Postponed

Hollande has backed the need for bold steps to help the bloc's third and fourth biggest economies, adding to the pressure on Merkel, who earlier in the evening had to watch Germany lose to Italy 2-1 in the Euro 2012 soccer semifinal.

Hours before the lower house of the German parliament was due to approve the eurozone's permanent rescue fund and a fiscal compact treaty to enforce budget discipline more strictly, she reaffirmed her firm opposition to common eurozone bonds.

But Merkel failed to achieve any immediate progress on her demands for EU authorities to be given the power to override national budgets and economic policies. The issue was kicked down the road to October, when top EU officials led by Van Rompuy will deliver a more detailed report.

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German Chancellor Angela Merkel, center, speaks with European Central Bank President Mario Draghi, left, and Italian Prime Minister Mario Monti during a round table meeting at an EU Summit in Brussels on Friday, June 29. (AP)

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