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So the new system may not be immediately applicable to Spain, which has put in a request for €100 billion of loans from the temporary rescue fund, the European Financial Stability Facility (EFSF) to recapitalise its banks. For now the loan will add to Spain's debt burden. But European officials say that once the supervision system is up and running, the permanent rescue fund, known as the European Stability Mechanism (ESM) could assume the burden back from Spain. The new arrangement may eventually be of assistance to Ireland, which is saddled with the debts of its collapsed banking sector.

Another gesture of reassurance to markets is the commitment that the debt owed by Spain to the EFSF, if and when it is transferred to the ESM, will not gain seniority. The prospect had spooked private investors, who feared subordination if the official sector became involved. When Greek debt was restructured earlier this year, bonds held by the ECB were not subjected to losses.

These decisions mark a real concession by Angela Merkel, the German chancellor, who had drawn the line at assuming other countries' liabilities until more progress was made toward political union. This may complicate the ratification in the Bundestag of the treaty establishing the ESM.

It is also a victory for Mariano Rajoy, the Spanish prime minister who, along with Italy's Mario Monti, had threatened to block any agreement at the summit unless their demands were met. Mr Rajoy obtained satisfaction, but the same is not quite true of Mr Monti, who had been the most adamant of the two.

The technocratic Italian prime minister had wanted a semi-automatic system for the rescue funds to buy the bonds of “virtuous” yet troubled states, such as Italy and Spain, without placing the countries under Greece-like programme. Mr Monti appears to have avoided the overt involvement of the dreaded “troika” of the ECB, the IMF and the European Commission. But any country benefiting from bond-buying will still have to sign a memorandum of understanding with the euro zone, and comply with a raft of existing conditions monitored by the European Commission.

Mr Monti declared himself satisfied, but caused considerable irritation to partners. Among the deals he had blocked was the "growth pact", a mixture of stimulus measures. "Who needs the growth pact? Not Germany," said one bemused participant. The euro zone's fiscal hawks say the bond-buying mechanism will be little different from the existing system. “Mario Monti raised a gun to his head and threatened to shoot himself. In the end he wounded himself in the shoulder,” said one scornful diplomat.

Implications for Greece

Greece's new government will demonstrate its reliability and proceed with the structural changes needed but hopes to push for a better bailout agreement when it resumes talks with international lenders--including asking for a Spain-style deal for its banks, the country's development minister said Tuesday.

Speaking at a conference in the Greek capital, Athens, Costis Hatzidakis said that Greece can ask its European peers to review the aid given in the country's banking system under new terms, based on recent decisions taken at last week's European Union summit.

"This is something that will automatically reduce our debt by several billion," he said. "If we are reliable, [the international creditors] will show their solidarity," he added.

Greece is keen to exploit a new bank-recapitalization plan agreed at last week's summit that would allow euro-zone member states to pass on the costs of shoring up local banks to Europe's soon-to-be launched bailout fund, the European Stability Mechanism. The deal is expected to favor Spain, which has asked for up to 100 billion euros ($126 billion) in aid for its ailing banks but hopes to avoid boosting its government-debt burden.

In Greece's case, that would mean reducing the total stock of debt--now more than EUR330 billion--by as much as EUR50 billion, which has been earmarked for the country's lenders as part of an earlier debt-restructuring deal.

Mr. Chatzidakis remarks come just two days before the heads of a delegation of international inspectors from the European Commission, International Monetary Fund and European Central Bank--known as the troika--will begin a three-day visit to Athens to assess Greece's progress in implementing its latest EUR173 billion bailout program.

Mr. Chatzidakis also said that the political situation, and especially the political stability of the country, is critical. "We need a new political and social climate, in which Greece could make a pleasant surprise," he said.

Greece's three-party-coalition government is likely to receive a vote of confidence in parliament this weekend.

Source: Economist & Wall St. Journal