Debt crisis: Spain and Italy to be bailed out in £600bn deal

 Two rescue funds are to be used to buy the debts of the troubled economies, the cost of which have reached record highs in recent weeks.

It is hoped that the move, which represents a substantial shift in policy for Germany’s chancellor, Angela Merkel, will send a strong signal to financial markets that Europe’s biggest economy is finally prepared to back its weaker neighbours.

Mrs Merkel and other European leaders have come under intense pressure at this week’s G20 summit to take radical action to stem the growing euro crisis which has pushed up the cost of Spanish bonds to unsustainable levels. The communiqué issued at the end of the G20 summit, which finished in Mexico last night, said that European leaders had agreed to take action to bring down borrowing rates.

Under the proposed deal, two European rescue funds – the £400 billion (€500  billion) European Stability Mechanism (ESM) and the £200 billion (€250  billion) European Financial Stability Facility (EFSF) – will buy bonds issued by European countries. 

Previously, money in these funds — which has been provided by members of the single currency — has been used to bail out smaller European countries such as Greece, Portugal and Ireland. Governments in these countries were offered money directly in return for agreeing to austerity programmes. Under the new plan, the money in these funds will not be given directly to governments but will instead be used to buy up debts on the financial markets. The European Central Bank previously bought about £170 billion (€210 billion) of bonds in this way but stopped last year. It is hoped the new plan will drive down the cost of Spanish and Italian bonds by showing that the eurozone is prepared to stand behind the debts of its members. President Barack Obama met David Cameron and other European leaders yesterday to discuss the proposed deal and an EU-American trade deal. 

By Robert Winnett, Political Editor in Los Cabos, Mexico 1R2Y45TH2R2?GVMSGNL