European Crisis: Markets Surge as Marathon Summit Delivers Hope For End to Crisis

• Summit agrees to direct recapitalistion of banks from ESM
• Moves towards Europe-wide banking union
• Bailout funds given permission to activate in bonds markets
• Growth pact worth €120bn to stimulate economy finalised
• 
  

1530 BST: About that deal ...

Dutch Prime Minister Mark Rutte says he hasn't ruled out asking for collateral from Spain to back loans advanced from the EFSF - despite the ink not being yet dry on a deal that suggested Spain's current lenders wouldn't rank below new lenders (ie wouldn't be subordinated). Finland's Prime Minister, Jyrki Katainen, said pretty much the same thing earlier this morning.

There's clearly a lot of work to do in order to ensure this Summit's achievements match its rhetoric.

1455 BST: It's all good ..

... or so says Frank-Walter Steinmeier, leader of Germany's Social Democrats and the main opposition party to Angela Merkel's Christian Democrats, says he expects the Bundestag vote on ESM ratification to pass later this evening, despite the Summit agreement changes.

How this affects the legal challenges to the ESM's ratification by the German President, Joachim Gauck, remains to be seen.

1430 BST: Uncertain times

Italy's Prime Minister, Mario Monti, the man credited with scoring the second massive national victory over the Germans in a single day, says he "doesn't know" if the Summit agreement will be enough to stablize the markets. He also says Italy may need to apply for EU funds (via the EFSF) but has no intention of doing so at the moment.

I'm not convinced this is the kind of persuasive talk we would have expected following the triumphant headlines splashed across the Italian press this morning.

1425 BST: So it's not just me, then!

Ireland's Central Bank Governor, Patrick Honohan, reiterates what many have been saying throughout the day: the EU Leaders' Summit agreement "leaves many critical decisions unanswered" although he admits a broad direction on solutions seems to have been established. He says it remains to be seen whether initiatives on bank recapitalisations are enough "in themselves" to reassure markets.

1405 BST: Cameron Press conference

UK Prime Minister David Cameron takes questions from reporters in Brussels on both the decisions taken at the Leaders' Summit and the on-going banking crisis back home in Britain.

Mostly standard fare, to be honest, with an evasive reply on the demand for a full "banking inquiry" made by Deputy Labour leader Ed Balls.

1315 BST: Demi-tour?

France's business daily, Les Echos, reports of a plans for huge cuts to French public spending to be announced this summer, only hours after new President Francois Hollande scored his "growth pact" victory at the Brussels' Summit.

1310 BST: German ESM vote

Angela Merkel says Germany's parliament will vote on ESM ratification later day. It will be interesting to see how the overall narrative of the Summit - a complete German collapse - with play in the minds of her domestic political rivals as they prepare to make their decisions.

1205 BST: No change to libor

The British Bankers' Assocation published its key libor fixings this morning, and there's been literally no change between yesterday's and today's quote of 0.46060 percent for three-month dollar rates.

La plus ca change.

1145 BST: More contradictions emerge

Reuters reports and EU official telling the agency that the EFSF's "flexibility" could allow it to buy bonds in both the primary and secondary market - exactly what Dutch PM Mark Rutte said was *not* agreed late last night.

European Central Bank President Mario Draghi says he's pleased with the "strict conditionality" applied to the new agreements, despite the EU Leaders' statement's suggestion that no new conditions would be applied to states asking for assistance.

1105 BST: King not drawn

Bank of England Governor Mervyn King refuses to be drawn into UK press machine's demand for Bob Diamond's head, saying "this morning is not the time" to comment on individual banks or executives" during a press conference to follow up the Bank's semi-annual statement on risk and sability in Britain's financial system.

1020 BST: Bond rally stalls

Italian 10-year yields are back over 6 percent and German September Bund futures are back to the highs of the day (1.4181) as investor start to poke holes in last night's Summit agreement and prase statements this morning from the various leaders.

1005 BST: Are you watching Van-Rompuy?

The rhetorical football terrance chant was given new meaning last night as Europe's journalists expressed clear viewing preference during the EU President Herman Van Rompuy's press confernece. *Definitely* worth a look.

http://www.openeuropeblog.blogspot.co.uk/2012/06/which-was-more-important-italian.html

1000 BST: Barclays reserach comment on Eurozone summit:

Taken together with the agreement on the Growth Pact (which includes extending EIB capital, allocating structural funds, and the pilot programme for project bonds), the overall package of measures is in line with our earlier expectations, but it stops short of new decisive measures that would definitively mark a turning point. That said, the summit is not yet over, and if it could also deliver later today agreement on at least some aspects of a roadmap for greater fiscal integration, this would greatly increase the chance that the ESM in its current form, possibly with some help from the ECB, could act as a bridge for a couple of years.

0925 BST: Confusion now

Market chatter is alive with debate over the actual meaning of last night's Summit agreement after Anglea Merkel appears to have challenged the consensus that EFSF bond purchases will not include extra conditions on the country requesting the action.

CMC Senior Market Analyst Michael Hewson Tweets:

Michael Hewson ‏@michaelhewson

Monti says no conditionality, Merkel and Hollande say there is conditionality - who is right?

0905 BST: Merkel damage control

Chancellor Angela Merkel begins the process of talking down the markets with comments that suggest conditionality to both EFSF buying and bank recapitalisations. Absent further details from today's follow-up meetings, you get the sense investors are going to start questioning the fuller implications of last night's agreement before too long - especially if the leaders themselves begin to water it down.

0850 BST: Torrid bond markets

Huge moves this morning in Spanish and Italian debt. While investors are adding risk to Germany's bond market (benchmark 10-year debt yields have risen to 1.675 percent) to reflect the extra financial burden it now faces if the Summit draft agreements are put into place, they're also marking down yields around the periphery.

Spain's 10-year bonds are trading at 6.44 percent while Italy's are pegged at 5.88 percent, both are massive improvement's to yesterday's levels. The extra yield, or spread, investors demand to hold Spanish debt instead of bunds has narrowed to 483 basis points, the narrowest difference since December of last year.

0835 BST: Collateral support

Shares in Irish banks are rising quickly this morning on speculation the "direct recapitalisation" mandate for both the EFSF and the ESM. Ireland's Deputy Prime Minister Eamon Gilmore calls the development a "major game changer" and says it will "significantly" improve Ireland's chances of avoiding a second bailout.

Italian banking shares are also surging, with UniCredit up more than 7 percent and Intesa Sanpaolo up more than 6 percent. Banca Monte dei Paschi rose more than 3.5 percent.

0825 BST: What's been agreed?

The details need to be hammered out again today, and there is some contradiction with respect to some of the specifics, but investors clearly like the broad strokes of last night's Summit statement.

The European Financial Stability Fund (EFSF) will be used "in a flexible and efficient manner in order to stabilise markets for member states", according to the EU Leaders' statement. What we don't know at this point is whether the EFSF will be able to buy bonds directly in the primary market (when they're sold by the government) or in the secondary market (when they're traded by investors). Dutch Prime Minister Mark Rutte seemed to suggest the latter was "not going to happen".

If, then, the EFSF buys bonds at auction, it would seem that the sellers (Italy and Spain) would not be required to submit to any extra austerity measures or Troika oversight beyond signing a "memorandum of understanding" with the EU to clean up its financial act. The authority of the EFSF will be transferred to the permanent European Stability Mechanism (ESM) once it's ratified by the remaining member states (including Germany).

The two funds will also be allowed to directly recapitalise banks around the region - without the demand of conditionality on the sovereign or the addition of any extra debt onto its national balance sheet. The flipside for this is that Germany won agreement on the creation of a Europe-wide "banking union" with single regulatory oversight.

Reports from the Summit suggest Italian Prime Minister Mario Monti and Spanish Premier Mariano Rajoy withheld support for the €130 "growth pact" until they were able to wring a series of concessions from Chancellor Angela Merkel.

0805 BST: Very strong opening

Britain's FTSE 100 gains around 1.7 percent in the immediate minutes of trading while the FTSE Eurofirst 300 rises 1.6 percent to 1,011.14.

Big gains also seen in Spain (+3.8 percent) France (+2.9 percent) and Italy (+3.1 percent). The DAX is up 2.6 percent.

0750 BST: Good Morning!

A huge step was taken last night by leaders of the 17-memeber Eurozone to finally draw a line under the two-year debt crisis that has plagued growth around the region and led to the financial rescues of five of its member states. The pledges agreed last night to stimulate growth and allow easier access to bailout funds and bond market support help lift the single currency to its best gains in more than 8 months and reverse a series of losses for shares around Asia.

The Euro gained more than 1.1 percent to 1.2581 against the greenback after Summit negotiations broke up at 0430 BST - the largest single-session rise since November. The MSCI Asia Pacific Index rose more than 2 percent before paring gains nearer to the end of its trading day to around 0.73 percent, putting the benchmark at 114.92.

Financial bookmakers are calling for strong immediate gains on the major European indices, including a triple-digit rise for the DAX and a 83 point lift for the FTSE 100, whose performance is still being held back by litigation concerns linked to the British banking sector.

Bond markets marked a huge improvement on Spanish and Italian 10-year yields at the start of trading, taking the former down 21 basis points to 6.66 percent and the later below 6 percent (5.96 percent) for the first time this week. September German bund futures tumbled 140 ticks in the opening minutes of trading to 140.30.