European leaders reach agreement on direct recapitalization of Spain's banks

After nearly five hours of heated debate behind closed doors, and with direct pressure from Spain and Italy, the 17 euro zone leaders agreed early Friday to give bailout money directly to Spanish banks without using the national government as a middleman.

The agreement — personal victories for Spain’s Prime Minister Mariano Rajoy and Italy’s Mario Monti — came after German Chancellor Angela Merkel established that the EU would come up with a continental-wide banking authority that will regulate financial institutions by the end of the year.

Speaking at a news conference Friday afternoon, Rajoy said he was “very satisfied” with the results of the summit.

“This council has paved the road that we must now take that will lead us out of the crisis. But we still have a lot of work ahead of us,” he said. “The agreements we reached were without pressure from any sides.”

The markets reacted with euphoria over the brokered agreement coming out of Brussels.

Spain’s blue chip Ibex 35 was up 5.66 percent, closing at 7,102.20 points — its biggest rise since May 2010. The country’s risk premium closed at 474 basis points over the benchmark German bund, the biggest fall since last August. Even the euro surged to 1.26 against the dollar.

It was not clear on Friday what terms Spanish banks that receive aid from Brussels will be held to. Rajoy said that those details, including the exact amount Spanish financial institutions will receive from the bailout package, will be decided on July 9, when the EU Economic and Financial Affairs Council (Ecofin) meets.

Spain and Italy have long argued that EU bank bailout money given directly to national governments — so they can funnel it to the banks in their countries — would push their borrowing costs unbearably high. But Merkel was insisting that the EU treaty didn’t allow for the direct recapitalization of national banks.