Debt crisis: ECB pledges action as southern Europe buckles Both investors and southern European governments had expected the ECB to come to the rescue once EU leaders had agreed in June to a "road-map" towards a banking and fiscal union. But Germany has effectively vetoed ECB action. The bank, meanwhile, is worried that pin-prick intervention would be self-defeating at this stage. Small-scale purchases of Spanish and Italian bonds would subordinate other creditors and set off further capital flight. There is no political consensus for the sort of massive intervention needed to take the risk of sovereign default off the table altogether. Andrew Roberts, credit chief at RBS, said the whole system was close to falling apart. The reality is sinking in that there is no big bazooka to solve this crisis. The Germans, Dutch, and Finns were ambushed at the summit and are now saying they didn't agree to do all these things once they got home," he said. Nothing has changed. We are no closer to fiscal union, and the banking union is ludicrous. We are getting very close to the end-game but nobody wants their fingerprints on the dagger," he added. Spanish bonds have been pummelled on reports that Spain would have to bear the full cost of rescuing its banks rather than shifting the burden on to the ESM, as originally supposed. Brussels sought to calm the waters yesterday, insisting that the EU summit deal had indeed cleared the way for a direct rescue of the banks, provided Spain created a "bad bank" and took steps to shut down crippled lenders. There will be no need for a sovereign guarantee. The very clear purpose is to break the vicious circle between banks and sovereigns," said an EU spokesman. Yet German finance minister Wolfgang Schauble told El Pais that the rescue package - up to €100bn - will be a loan to the Spanish state. He said there will be no direct aid to banks until a new supervisory body is in place under the control of the ECB, which will not be ready this year. It will take time. Everyone knows that the set-up of a European bank supervisor isn't a trivial matter. EU ministers agreed to give Spain an extra year until 2014 to meet its deficit target of 3pc of GDP, recognising that the eurozone's double-dip slump has made a mockery of the original plans. The ceiling will be 4.5pc in 2013 and 6.3pc this year. Spanish economists have been warning for months that "scorched-earth" cuts are pushing Spain into a downward spiral and are politically untenable in a country with 24pc unemployment. Spain will have to tighten fiscal policy by €30bn (£23.7bn) as promised earlier, but will not have to chase its tail by cutting yet further as deeper recession eats into tax revenues. Treasury minister Cristóbal Montoro said the country will raise VAT, increase the working hours of public employees and subject them to "private sector" practices - a move that risks precipitating an angry riposte from the trade unions. "The government will comply with the conclusions of the European Council, but we insist that all governments and all EU institutions do so as well," he said. The rebuke was aimed clearly at Finland, Holland, Germany and the ECB. In Brussels, eurozone finance ministers warned Greece that it could not expect further tranches of aid under its EU-IMF "Troika" programme until it does more to comply with bail-out terms.