June's meeting of the Euro area's leaders was one of the rare summits that produced a concrete breakthrough that was welcomed by most observers as a genuine step forward. The summit statement began with the bold sentence
We affirm that it is imperative to break the vicious circle between banks and sovereigns.
And then asserted that
When an effective single supervisory mechanism is established, involving the ECB, for banks in the euro area the ESM could, following a regular decision, have the possibility to recapitalize banks directly.
This decision was widely viewed as crucially important for Spain's economic future. With the risk of significant banking recapitalization costs weighing heavily on the market's assessment of Spanish debt sustainability, the announcement was seen as a crucial step by Spain's Eurozone partners towards sharing the risks associated with its banking sector.
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