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The eurozone bailout funds will be allowed to directly recapitalise banks and buy bonds of troubled countries, without an "adjustment programme" to be required, as before. The big news came in the early morning of 29 June as a result of lengthy negotiations among European leaders. "We agreed on something new, which is a breakthrough, that the banks can be directly recapitalised in certain circumstances [...] and we are opening the possibilities to countries who are well-behaving to make use of the financial stability instruments, EFSF/ESM, in order to reassure markets and get some stability around their sovereign bonds," European Council President Herman Van Rompuy said at a press conference before dawn.

It was clear that there was something in the air already on 28 June afternoon, when news was spread that the Eurogroup Working Group had convened for unexpected meeting, in parallel with the summit. It is the working group, which consists of top experts from 17 eurozone countries, that prepares the concrete decisions to be approved at political level. The last time it held a meeting alongside the leaders was when the second Greek loan was being negotiated, so the news was interpreted as a sign that important and even surprising decisions were to be expected.

The summit agenda provided leaders to have a late dinner during which to discuss the growth pact and the eurozone reforms. But as confirmed by French President Francois Hollande, Spain and Italy refused to support any long-term decisions before urgent were taken measures to alleviate the difficulties of both countries. Once it became clear that there would be no quick agreement on the growth pact, the eurozone leaders began discussing the demands of Spain and Italy. As a result, early in the morning they came out with a statement revealing two major changes:

The first is that as soon as possible (by the end of 2012) a single supervisory mechanism for eurozone banks, involving the ECB, should be adopted. As the report of Herman Van Rompuy on the eurozone reforms notes, the ECB can get the role of banking supervisor on the basis of Art. 127 (6) of the Treaty on the Functioning of the European Union (TFEU). It says that "the Council, acting by means of regulations in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament and the European Central Bank, confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings." Charging the ECB with such responsibilities requires no treaty change, unlike the creation of a special new supervisory authority, so it is a quick and easy option. What option exactly will be chosen, however, will become clear from the proposal that the European Commission is to submit soon. Internal Market and Services Commissioner Michel Barnier wrote on Twitter that he had started preparing the proposal immediately.

Once this single supervisory mechanism is created, the eurozone banks could be directly recapitalised by the European Stability Mechanism (ESM) – the permanent bailout fund for the euro area. In return, a Memorandum of Understanding will be signed, which will include institution-specific, sector-specific or economy-wide conditions. This means that there will be different practises for different countries, according to individual circumstances.

The good news is for Ireland, who will benefit from the new conditions because of its well-performing adjustment programme. The statement states that "similar cases will be treated equally," meaning that countries with good fiscal discipline but affected by external factors will receive a common treatment, unlike the others, experiencing problems with "bad fiscal behaviour". Irish Prime Minister Enda Kenny described the agreement as a "seismic shift" in European policy and said it would allow to ease the debt burden on Irish taxpayers.

Regarding Spain, as was previously announced, the bank recapitalisation loan will be allocated by the temporary fund EFSF and then transferred to the permanent ESM once it becomes operational, without gaining seniority status. This was one of the main investors` concerns, because this status means that the ESM loans are paid with priority. The other very important news for Spain is that the loan will be granted under the current conditions but as soon as the new rules take effect, the loan "will be very rapidly taken off the balance sheet of the Spanish sovereign," the president of the Eurogroup Working Group, Thomas Wieser, explained. This means that the loan will not be considered government debt.

The second big change is that the existing instruments of the rescue funds will be used more flexibly and effectively "in order to stabilise markets for Member States respecting their Country Specific Recommendations [CSR] and their other commitments including their respective timelines, under the European Semester, the Stability and Growth Pact and the Macroeconomic Imbalances Procedure." It is about the possibility the EFSF/ESM to buy debt of distressed countries, subject to compliance with budgetary discipline. The ECB will serve as an agent to the funds in conducting market operations. A memorandum of understanding (MoU) would be signed but there would be no macroeconomic adjustment programme. According to European Council President Herman Van Rompuy, there would be no more countries under programmes. Thomas Wieser explained that the memorandum would reproduce the CSRs for the country concerned under the Excessive Deficit Procedure or Macro-economic Imbalances Procedure, probably adding timetables for their implementation.

The question is whether this means changing the treaty on the creation of the ESM (the permanent rescue fund), which today (29 June) must be approved by the Bundestag together with the Fiscal Compact. Art.16 (2) of the treaty reads that "the conditionality attached to the ESM loans shall be contained in a macro-economic adjustment programme detailed in the Memorandum of Understanding." However, Art. 12, describing the ESM`s working principles, stipulates that the conditions depend on the financial assistance instrument chosen. "Such conditionality may range from a macro-economic adjustment programme to continuous respect of pre-established eligibility conditions," for which namely compliance with the CSR under the European Semester could be considered.

The decision was labelled as a victory for Italian Prime Minister Mario Monti, who has been insisting for long well-behaving countries to be allowed to use the rescue funds without signing a rescue programme. "There would be no troika," Monti said while leaving the pre-dawn meeting. The agreement represents a German concession, since Berlin was under strong pressure as by its euro partners -Italy, Spain and France, as well as the European Commission -so internationally, by the IMF, the G20 and the US. However, the condition the ECB to supervise banks actually meets the German request banks to receive money only in exchange for centralised control. In recent days Chancellor Merkel repeatedly said she could not give money to Spanish banks unless she was aware of their situation or how the money would be spent. As to the purchase of sovereign bonds, with or without the Troika, conditions will be in place and compliance with budgetary discipline will also be ensured by the new powers of the Commission after the so called “Two Pack” is adopted. It includes two regulations that enhance the control of Brussels on national budgets, particularly to countries experiencing economic and financial difficulties.

The questions with no answers at this stage are related to the practical implementation of the decisions. Although Mario Monti said Italy did not intend to ask for help for the moment, the question is whether the EMS resources will be sufficient if it has to buy Italian debt and to allocate financial support to Spain and Cyprus (for now). The overall lending capacity of the two funds is 700 billion euros but by mid-2013, when only the ESM will remain, its maximum lending capacity will still be 500 billion euros.

Another question is, although these decisions do not apply to countries that have already received bailouts (except for Ireland), will they too ask for changes. Especially Greece which wants to renegotiate its rescue program and is likely to take advantage of the situation to get rid of the supervision of the hated Troika. According to officials in Brussels, nothing will change in the existing rescue programmes. There will be probably more clarity on these issues after 9 July, when the Eurogroup is expected to dress the decisions of the leaders in specific details.