Finance ministers from the 17 eurozone countries agreed on Thursday to make 60 billion euros available ($79 billion) for stabilizing banks, in an effort to prevent failed financial institutions from bankrupting entire nations.

The money would come from the European Stability Mechanism (ESM), the eurozone's 500-billion-euro permanent bailout fund. Under previous rules, the ESM could directly finance governments only. Those governments, as in the case of Spain, could then use the money to stabilize their banks.

"Today, we took an important step on the way toward setting up a bank union, by agreeing to the main points for the future regulation of direct bank recapitalization," German Finance Minister Wolfgang Schäuble said in Luxembourg, where the 17 ministers were meeting.

Step toward banking union

Eurozone member states such as Cyprus and Ireland have already been forced to seek sovereign bailouts due to failed banking sectors. Under pressure from mounting fiscal problems in Spain and Italy,  the eurozone agreed last year to form a banking union. One of the reasons for forming the union was to empower the ESM to directly bailout failed banks.

"This instrument will help preserve the stability of the euro area and help [remove] the risk of contagion from the financial sector to the states," eurozone chief Jeroen Dijsselbloem said.

According to Thursday's agreement, states would still have to contribute a small sum toward saving their banks. Initially, they would finance 20 percent of a bailout. But there are plans to eventually reduce that participation to 10 percent. The reduction is expected to occur in 2016, two years after the scheduled implementation of direct eurozone bank bailouts.

The ESM money designated for banks has been limited to 60 billion euros, in order to preserve the permanent bailout fund's top-notch credit rating. Lending to banks is considered riskier than lending to governments, the ESM's main job.  

Although some basic guidelines have now been set, two other major components of the banking union still need to be hashed out. First, the eurozone has to agree on how to unwind bad banks. Second, the currency bloc has to establish a Europe-wide joint deposit guarantee.

Guidelines on how to unwind bad banks will be discussed during the finance ministers meeting on Friday.

slk/jm (AP, AFP, dpa, Reuters)