EU leaders set to focus on debt crisis as a means of attacking with Banks ECB

Union leaders this week to discuss the creation of a permanent mechanism to underpin the most indebted countries in the European Central Bank is developing plans to help the weakest lenders in the region.

At a summit in Brussels on December 16 and 17, the group will face skepticism from investors about their willingness to stop a sovereign debt crisis led to bailouts for Greece and Ireland, and threatens to spread. 10-year bonds fell for a sixth of Spain today as the government prepares to sell debt this week.

"I do not think there's anything you can get to resolve things immediately," said David Owen, chief European economist at Jefferies International Ltd. in London. "The problems will continue. The markets are very focused in the first weeks of next year when not only the sovereign, but the banks have to go to the market for a large amount of funding."

A draft summit declaration sets a deadline of January 1, 2013, by the 27 EU countries to ratify a treaty amendment which provides for a "stability mechanism to safeguard the stability of the euro area as a whole," with financial assistance to governments in distress "subject to strict conditions."

The mechanism would be in charge of 440 million euros (585 billion U.S. dollars) European Financial Stability Fund, launched in May and ending in mid-2013. Assistance from the central budget of the EU and the International Monetary Fund make up the remainder of the current rescue package of 750 million euros.

BCE-Addicts Banks

Meanwhile, ECB officials are focusing on how to reduce banks' dependence on emergency liquidity measures, according to comments made last week by members of the Board of Directors Mario Draghi and Yves Mersch.

German and French leaders have pledged to do everything necessary to defend the currency. the survival of the euro is "not negotiable", that require monitoring of the budget and closer economic cooperation to overcome the "structural weaknesses" in the region, German Chancellor Angela Merkel and French President Nicolas Sarkozy said on 10 December after a meeting in the German city of Freiburg.

EU officials are considering measures to finance the rescue region to buy government bonds in trouble, the Financial Times reported today, citing people involved in the meetings. They are also considering allowing the lines of short-term credit for struggling nations to borrow, but not in need of rescue, the newspaper said.

Berlusconi confidence

Investors may also focus on Italy, where Prime Minister Silvio Berlusconi faces a censure motion. Rome lawmakers today began debating a censure motion and the vote, scheduled for tomorrow, will determine whether Italy's richest man may sustain his government, whose mandate is still two years.

The yield premium on the debt to 10 years in Italy on comparable German bonds, a benchmark in Europe, more than double this year, bringing the euro was the high of 212 basis points on November 30. Was at 162 basis points today.

"Italy has to be looked at carefully," said Owen, who took note of the debt equal to 116 percent of production as a concern. The reality is that "if markets perceive that Italy has a problem, then, Italy has a problem."

A default in Europe could throw the region into a recession, Ernst & Young, said in a report released today. "The political leadership of the euro area is facing an existential challenge to the welfare" of the region, Ernst & Young partner Mark Otty wrote.

"Very reluctant"

Any further spread of the debt crisis may increase the pressure on the ECB to increase its bond program with purchase option.

"The problem is that the different parties at the ECB are very reluctant to do that," said Owen. "The question is if events overtake them."

ECB officials are discussing measures to deal with banks too dependent on central bank financing, the Board member Mario Draghi said last week. The ECB is discussing "concrete proposals" for banks, Draghi said, according to the Financial Times. Such measures would be part of an exit strategy of the ECB, the newspaper said.

"Clearly we have the phenomenon that some banks rely on the ECB's refinancing," said Council member Yves Mersch Government Neue Zuercher Zeitung in an interview published on 11 December. "This is working right now and probably going to present a solution in one of our next meetings."