EU leaders agree to debt summit

 

European Council president Herman Van Rompuy has called an emergency summit of euro zone leaders next Thursday as it seeks to prevent contagion from the debt crisis spreading to Italy and Spain.

News of the summit came as five Spanish banks ranked among eight institutions to fail a new stress test on European banks that revealed a total capital shortfall of approximately €2.5 billion. This figure was considerably lower than the estimates of many investors.

Ireland’s three remaining banks – Allied Irish Banks, Bank of Ireland and Irish Life Permanent – each passed the test, but the criteria were less severe than in a separate examination of Irish banks in March. The tests revealed them to have large holdings of Irish Government debt.

Mr Van Rompuy had been trying for days to call a summit in an attempt to bring divided euro zone leaders together over the involvement of private creditors in a second international bailout for Greece.

Confusion over the new rescue package has stoked a fresh wave of turmoil in markets, with Spanish and Italian borrowing costs rising to levels unseen since the euro was introduced in 1999.

While this has led euro zone finance ministers to examine a deeper European response to the debacle, German chancellor Angela Merkel resisted coming to a summit on the basis that the conditions would not be right for such a meeting until a deal is imminent.

Even as she changed heart last evening, there was scepticism in Berlin and Brussels about the merits of calling an emergency gathering at a time when many tricky outstanding questions remain unresolved.

However, a senior European envoy said yesterday the view has gained force among key states that an upsurge in volatility this week called for more resolute action.

“Our agenda will be the financial stability of the euro area as a whole and the future financing of the Greek programme,” said Mr Van Rompuy in a brief statement last night.

“I have asked for the preparatory work to be brought forward inter alia by the finance ministries.”

Dr Merkel is expected to come under pressure at the meeting to provide definitive support for an escalation of Europe’s campaign to tackle the 21-month debt crisis.

This includes an overhaul of the European Financial Stability Facility bailout fund, giving it powers to charge lower interest on its loans and extend their maturity dates.

Guarantees for new bond issues by bailout recipients are on the table, as is the prospect of the fund lending to countries so they can buy back their own bonds at market prices, thereby reducing their debt burden.

The banks that failed the stress test included two from Greece and one from Austria.

Another 16 came close to failing and one German institution pulled out of the exercise before the results were made public.

Following sharp criticism of the previous test last year, seen as far too weak, the European Banking Authority said the new test had been “deliberately severe”.

The test did not account for sovereign default, but banks were obliged to reveal their holdings of sovereign debt.

This was designed to facilitate an examination of their holdings by market analysts.

AIB was revealed to have the biggest holdings of risky sovereign debt, with €5 billion of Irish bonds, €816 million of Italian bonds, €335 million of Spanish bonds, €243 million of Portuguese bonds and €40 million of Greek bonds.

Bank of Ireland has €5.5 billion of Irish sovereign debt but just €30 million of Italian debt.

Irish Life and Permanent has €1.8 billion of Irish bonds but no other risky EU sovereign debt.