A welcome step but not a solution

The deal agreed between the 17 leaders of the eurozone in Brussels during the early hours of yesterday is welcome, even though its specifics have yet to be agreed.

The arrangement should help to stabilise the bond market.

They also agreed to establish a single supervisory body for eurozone banks before the end of 2012. This could be a major step in setting up a European banking union that should be better able to avert the chaos that was feared in recent weeks.

The Irish may well punch above their weight on the international scene. Nevertheless we are still just a tiny nation and our real influence, even if disproportionate, is still very small.

For weeks, Angela Merkel, the German chancellor, appeared uninterested in our banking problems. However, the problems of Spain were too big to ignore, especially when there were fears that, if those were not treated, they would spread to Italy and fuel the vicious cycle that began in Greece.

Hence, when EU leaders met this week, Ms Merkel appeared to make a seismic shift in backing down. “What was deemed to be unachievable has now become a reality and that principle has been established,” the Taoiseach said after the meeting.

Eurozone leaders decided Spain would be allowed to have its banking debt recapitalised by the European Stability Mechanism, the EU’s permanent bailout machinery. It was also decided that the same facility would apply retroactively to Ireland.

This essentially means that the ESM will underwrite the bank recapitalisation in this country, rather than the Irish taxpayer. The money will still have to be repaid over about 30 years, so it is not as if we are being given something for nothing.

The big advantage is that it brings down the cost of borrowing for indebted countries, and this will inevitably lessen the debt burden on Irish taxpayers. What we are getting is a magnificent facility to borrow.

Ireland has been named as entitled to get the same treatment as Spain, and the advantages of this were immediately apparent yesterday, when the cost of borrowing for Spain dropped precipitately. Detailed arrangements have yet to be worked out among the finance ministers of the eurozone. As those are agreed, the interest rates are likely to fall further. This should mean that Ireland would be able to return to the borrowing market earlier than previously expected.

Taoiseach Enda Kenny emphasised that what has been agreed by the EU leaders establishes the fundamental principle that the ESM will provide funding to break the link between sovereign and bank debt. This had been a key demand of both the Madrid and Dublin governments in the run-up to the Brussels summit.

Mr Kenny has welcomed the agreement as a means of re-engineering the debt burden on our taxpayers. This should not be oversold, because it is not a solution, but it is a significant step in the right direction.