Eurozone agrees on bank recapitalisation Published duration 29 June 2012

media caption Mr Rompuy hailed the deal as a "breakthrough"

EU leaders have agreed to use the eurozone's planned bailout fund to directly support struggling banks, without adding to government debt.

After 13 hours of talks, they also agreed to set up a joint banking supervisory body for the eurozone.

Spain and Italy put pressure on Germany to allow the bailout fund to buy government debt in the markets - a measure to contain borrowing costs.

Eurozone leaders agreed to begin implementing the decisions by 9 July.

However, it could take until the end of the year before the new money becomes available.

Announcing the deal , EU Council President Herman Van Rompuy said it would break the "vicious circle" between banks and national governments.

The euro surged against the dollar in Asian trade after the news from Brussels. Stocks in Germany and London also rose sharply.

Financial control

The deal also tried to sort out a problem with a previous agreement to lend money to Spain's banks. There had been confusion over where that money would come from, and which lenders would have priority in the event of a default.

The new agreement made clear that the EU's existing bailout fund - the EFSF - will provide aid under the current rules until the new fund, the European Stability Mechanism (ESM), begins operations. The ESM is due to be launched next month.

The BBC's Andrew Walker, in Brussels, says these loans will also not be given "seniority" over private sector loans.

This means that if Spain were to default, those official lenders would not get preferential treatment. The move should make Spanish government debt a little more attractive to private investors, our correspondent says.

Analysts say Germany appears to have given ground after pressure from Spain and Italy to provide more support.

The two southern European countries had withheld support for a growth package worth 120bn euros (£96bn; $149bn), demanding immediate EU measures to lower their borrowing costs.

Spanish 10-year government bonds were trading at yields above 6.9% on Thursday, near the 7% considered unaffordable.

Our correspondent says although Germany appears to have compromised, Chancellor Angela Merkel has managed to ensure that Brussels has more control over the finances of eurozone countries, something she had wanted.

The deal came about after new French President Francois Hollande appeared to throw his weight behind Italy and Spain.

"I'm here to try to find rapid solutions for those countries facing pressure from the market, despite having made huge efforts to balance their budgets," the socialist French president said.

The 120bn-euro growth package agreed on Thursday evening is made up of:

A 10bn-euro boost of capital for the European Investment Bank, expected to raise overall lending capacity by 60bn euros

Targeting 60bn euros of unused structural funds to help small enterprises and create youth employment

A pilot launch of EU project bonds worth 4.5bn euros for infrastructure improvements, focusing on energy, transport and broadband.

'No magic formula'

In another significant move, the leaders backed a eurozone roadmap heading towards fiscal union.

The 10-year plan , presented by Mr Van Rompuy, envisages the creation of a European treasury, which would have powers over national budgets.

Mrs Merkel has warned there is no "magic formula" to solve the crisis. She argues that fiscal responsibility and tighter regulation must come first, before any pooling of eurozone debt.

But Mr Hollande and several other EU leaders want individual countries' debts guaranteed by the whole eurozone, as centrally issued eurobonds.