THE LEADERS of the 27 European Union member states have again affirmed their goal of splitting “the vicious circle” linking the debts of individual banks to the debts of the countries they are based in.

In a statement after the first day of a two-day summit in Brussels, the heads of government said it was “imperative to break the vicious cycle between banks and sovereigns”.

The two-day summit is discussing ways of further developing Europe’s economic and monetary union, and in particular looking at ways of developing a deal reached earlier this week on setting up a new EU-wide bank regulator.

The summit follows a meeting of the EU’s 27 finance ministers on Wednesday, where it was agreed that the European Central Bank and national central banks would together act as a ‘single supervisory mechanism’ for the regulation of banks.

Heads of state last night agreed that they should develop an “operational framework” – basically, a set of rules and procedures – early next year so that when the new system was operational, it could define what a “legacy asset” should mean.

This is of particular importance to Ireland, as clarity on the definition of a ‘legacy asset’ will determine which of Ireland’s banks could be in line to receive direct aid from the European Stability Mechanism, the Eurozone’s new bailout fund.

Though Ireland’s banks have already been fully recapitalised, it is still possible that the ESM could buy shares in Irish banks from the government, and thereby help it to recoup some of the costs it had already incurred in saving the financial sector.

Germany has indicated that it would approve the use of ESM funds to help banks which remain in active operation – meaning the government’s commitments to the likes of AIB and Bank of Ireland could be recouped – but that inactive banks, such as IBRC (the former Anglo Irish Bank), should not be given European funds.

Either way, the ESM will not be a position to give some of its funds to European banks until the new supervisory system is in place – which will not be until 2014 at the earliest.