Euro zone agrees on bank supervision, bond support

European leaders agreed on Friday to create a single supervisory body for euro zone banks and to allow them to be recapitalized directly by the currency area's rescue fund without adding to government debt.

European Council chairman Herman Van Rompuy said the aim was to create a supervisory mechanism involving the European Central Bank by the end of this year, and to break the "vicious circle" between banks and sovereign governments. He also said countries that were complying with European Union budget policies would be able to access the bloc's temporary EFSF and permanent ESM rescue funds to support their government bonds on financial markets. "We are opening the possibility to countries that are well behaving to make use of financial stability instruments in order to reassure markets and to get again some stability around some of the sovereign bonds of our member states," Van Rompuy told a 4.30 a.m. (0230 GMT) news conference after late night talks with leaders of the 17-nation currency zone. Spain and Italy had withheld their agreement to a growth package at a European Union summit to demand emergency action to bring down their spiraling borrowing costs, which threatened to force the third and fourth largest economies in the euro zone out of the capital markets. The euro surged on that news and was last up 1.1% on the day at USD 1.2581. The S&P futures also rallied, up nearly 1%.