Euro zone countries brought forward by one year to next July the launch of a permanent bailout fund and agreed, along with other EU states, to consider lending up to 200 billion euros to the IMF to help it fight the sovereign debt crisis.
But leaders of the 17-country euro zone decided the European Stability Mechanism (ESM) fund, which will have an effective lending capacity of 500 billion euros, would not get a banking licence as suggested by France.
Such a licence would have allowed the ESM to refinance itself at the European Central Bank's liquidity operations and give it enormous firepower, but it would also break EU law which forbids the ECB from financing government deficits.
"We… agreed on the acceleration of the entry into force of the ESM rescue fund. It should enter into force in July 2012," the chairman of the leaders' summit, Herman Van Rompuy, told a news conference early on Friday after a night of talks.
The ESM is to replace the temporary fund, the 440-billion- euro European Financial Stability Facility (EFSF), that leaders decided should be leveraged through a partial insurance scheme and co-investment funds and quickly deployed. The ECB will act as an agent for the EFSF and ESM in market operations.
The two funds will run in parallel between mid-2012 and mid-2013 and the leaders will assess in March 2012 if they need to change an earlier agreement to keep the combined lending capacity of both at no more than 500 billion euros.
Euro zone leaders agreed earlier this year that the ESM would have paid-in capital of 80 billion euros and callable capital of 620 billion euros. They had decided that the paid-in capital would be provided gradually over five years.
They now said they were ready to pay up more quickly.
"During the phasing in of the paid-in capital, we stand ready to accelerate payments of capital in order to maintain a minimum 15 percent ratio between paid-in capital and the outstanding amount of ESM issuance and to ensure a combined effective lending capacity of 500 billion euros," the leaders said in a statement.
CHANGED VOTING IN ESM
The leaders also assured bondholders that in the future the euro zone would follow the International Monetary Fund's practice on private sector involvement in debt restructuring.
"As regards the Private Sector Involvement, we have made a major change to our doctrine: from now on we will strictly adhere to the IMF principles and practices," Van Rompuy said.
"Or to put it more bluntly: our first approach to PSI, which had a very negative effect on the debt markets, is now officially over," he said.
Euro zone leaders "clearly reaffirmed" that the decision to seek a voluntary debt reduction by private bondholders of Greek debt was unique and exceptional.
They also said that standardised and identical Collective Action Clauses (CAC) would be included in the terms and conditions of all new euro government bonds. CACs are legal caveats which prevent minority bondholders from blocking a debt restructuring for the majority of bonds holders.
To make the ESM more nimble, voting in the fund would be changed to include an emergency procedure, which would replace unanimous decisions with a qualified majority of 85% — a change sought by France and Germany.
This emergency voting method would be used only if the European Commission and the European Central Bank said that "an urgent decision related to financial assistance is needed when the financial and economic sustainability of the euro area is threatened."
Because such a voting option might face problems in Finland, the leaders' statement said it would have to get the approval of the Finnish parliament.
Finally, to further reinforce crisis fighting resources of the International Monetary Fund, euro zone and non-euro zone members of the EU declared they would consider, and confirm within 10 days, if they would lend bilaterally up to 200 billion euros the IMF.
"We are looking forward to parallel contributions from the international community," the leaders statement said.
