By Laurence Norman and Vanessa Mock
-- Euro zone leaders pledge to stabilize markets, break link between banks and sovereign debt
-- Markets rise on announcement but some measures may not take effect for months
-- Leaders say they will allow direct bank recapitalization from bailout funds
-- Summit agrees access to rescue funds to "well-behaving" non-program member states
BRUSSELS--Euro zone leaders agreed Friday to a series of long-debated measures they hope will calm market pressure on Spain and Italy, including pledging to eventually allow direct recapitalization of euro-zone banks and opening access to the region's rescue funds to countries not in bailout programs.
After a 14-hour meeting that dragged through most of the night on the first day of a two-day summit, the leaders also agreed that loans to Spain for its ailing banks from the European Stability Mechanism, the region's permanent bailout fund, will not have senior creditor status over debt from private creditors, responding to a key concern that had weighed on the country's bonds.
Spain, which has sought aid of up to EUR100 billion to recapitalize its banks, will eventually be able to take the loans off its sovereign debt balance sheet, senior European official Thomas Weiser said.
"We affirm that it is imperative to break the vicious circle between banks and sovereigns," the leaders said in a statement. "When an effective single supervisory mechanism is established, involving the European Central Bank, for banks in the euro area the ESM could...have the possibility to recapitalize banks directly."
The euro lifted sharply after the late night announcements, while Asian stock markets surged. Nonetheless, the agreement left a number of questions unanswered while it was clear that some of the measures, such as direct bank recapitalization from the euro zone's bailout funds, won't be materialized any time soon.
European Council President Herman Van Rompuy said euro-zone banks will only be able to directly access the region's permanent bailout mechanism once a single bank supervisor is agreed. He said the European Commission will soon make a proposal on this.
However in a clear signal that direct bank aid may not be available until 2013, euro-zone leaders gave member states until the end of the year to agree on the supervisor.
But Mr. Weiser said countries that are not in bailout programs could have access to the EUR500-billion ESM and the temporary European Financial Stability Facility by the summer.
The leaders' statement tasked euro-zone finance ministers with "implementing" the decisions made by the next meeting of the eurogroup on July 9.
The leaders said they would also push forward on "a specific and time-bound road map for the achievement of a genuine monetary union" in a report that would go before the next scheduled European summit in October. This road map is likely to include steps toward a "grand bargain" of mutual bond issuance in return for a watertight regime of fiscal discipline and how to achieve tighter integration of the region's banking systems.
The breakthrough reached early Friday is also likely to pave the way for a final deal on a EUR120 billion growth pact when EU talks resume later Friday. The package was held up on Thursday night as Italy and Spain pushed for euro zone action to help ease the sky-high borrowing costs the two governments are facing.
Still, a dispute over where to locate the headquarters of the new European Union patent court could still complicate a deal. EU officials said the U.K. had refused to sign off on the growth pact until it gained a greater role in the court.
Italian Prime Minister Mario Monti, who drove a hard bargain to secure the measures, said they were very positive for the euro zone and should help to stabilize the region's economy.
"Italy has fought for these measures, in particular for those concerning stabilizing spreads," Mr Monti said. "But we have no intention of using them at present."
Mr. Monti stressed that the new mechanism will require countries to sign off a memorandum of understanding, but not to commit to new austerity programs, like those undertaken by Portugal and Greece.
The European Central Bank will act as "an agent" under the bond-buying program, the Italian prime minister said.
Jean-Claude Juncker, head of the Eurogroup of finance ministers, told reporters that "considering the difficulty of the moment and of the discussions, we have managed to send markets a message that - I hope - will convince them."
Meanwhile, German Chancellor Angela Merkel said the measures on making the deployment of the region's bailout funds more flexible were "good decisions."
Despite the praise, finance ministers will have to flesh out a number of issues in coming days. These include the exact terms attached to direct aid for banks, whether all governments will need to sign off on recapitalizations and what conditions non-bailout nations will need to meet to access the region's rescue funds.
Dutch Prime Minister Mark Rutte said his understanding was that there would have to be unanimity for any direct bank recapitalization.
Euro-zone leaders also offered a major signal they were ready to ease the conditions around the Irish bailout program.
In the statement, the leaders said they agreed to "examine the situation of the Irish financial sector with the view of further improving the sustainability of the well-performing adjustment programme."
In an apparent reference to Spain's bank aid program, which did not come with broad austerity conditions attached, the leaders agreed that "similar cases will be treated equally."
Prime Minister Enda Kenny welcomed the decision, saying euro zone finance ministers will look at how to "reengineer the debt burden that is on our taxpayer."
"For us now the more immediate impact is that Ireland is named as getting equal treatment with other countries with difficulties here," he said.
(Giada Zampano, Gabriele Parussini and Patricia Kowsmann and Nicholas Winning contributed to this article)
-Write to Laurence Norman at Laurence.norman@dowjones.com and Vanessa Mock at Vanessa.Mock@dowjones.com
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June 29, 2012 01:19 ET (05:19 GMT)
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