Eurozone opens door to direct aid for struggling banks

(BRUSSELS) - Eurozone leaders struck a deal Friday opening the door for its rescue funds to help bring down borrowing costs of nations in trouble and directly recapitalise banks, the EU president said.

Herman Van Rompuy said the eurozone would make a more "flexible" use of the rescue pot in order "to reassure markets and to get again some stability around the sovereign bonds of our member states."

Such action would be reserved for "well-behaving" nations, he said.

Facing soaring interest rates, Italy and Spain had blocked an EU growth pact until their partners yielded to their demands to use the rescue funds to buy bonds in the markets.

The direct recapitalisation of banks could happen after "an effective single supervisory mechanism" is established, with the participation of the European Central Bank, eurozone leaders said in a statement. Conditions would be attached to such direct aid, they said.

The leaders said the bank recapitalisation proposals should be considered "as a matter of urgency" by the end of the year.

Spain has requested aid for its struggling banks but the country wants to avoid taking in more debt.

"We affirm that it is imperative to break the vicious circle between banks and sovereigns," the statement said.