European debt deal lifts hopes for easing crisis
Source: Agencies |
October 28, 2011, Friday
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Print Edition
Print Edition
EUROZONE leaders struck a last-minute deal to limit the damage from the currency bloc's debt crisis early yesterday but are still far from finalizing plans to slash Greece's debt burden and strengthen their rescue fund.
After a summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens' massive debt load to sustainable levels.
Reached after more than eight hours of hard-nosed negotiations among bankers, heads of state and the IMF, the deal also foresees a recapitalization of hard-hit European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility, to give it firepower of 1.0 trillion euros (US$1.4 trillion).
European stocks surged to a 12-week high and the euro shot above US$1.40 to reach its top level against the dollar in seven weeks following the deal. But key aspects of the arrangement, including the mechanics of boosting the EFSF and providing Greek debt relief, could take weeks to pin down, meaning the plan to rebuild confidence after two years of crisis could unravel over the details.
"I see the main risk is that we are left waiting too long again for the implementation of these agreements," European Central Bank policy-maker Ewald Nowotny said yesterday. "Speed is very important here," he told national broadcaster ORF.
Three months ago, eurozone leaders unveiled another agreement that was meant to draw a line under the debt woes that threaten to tear apart the 12-year-old currency bloc. But they realized within weeks that it was inadequate given the depth of Greece's economic problems and their banks' vulnerability.
The new deal aims to address those holes. Under it, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of gross domestic product by 2020, from 160 percent now.
The eurozone will offer "credit enhancements" or sweeteners to the private sector totalling 30 billion euros. The aim is to complete negotiations on the package by the end of the year so Greece has a full, second financial aid program in place before 2012.
The value of that package, EU sources said, would be 130 billion euros -- up from 109 billion euros in the July deal.
"The debt is absolutely sustainable now," Greek Prime Minister George Papandreou said in Brussels after the deal was struck. "Greece can settle its accounts from the past now, once and for all."
In a bid to convince markets that they can prevent larger countries like Italy and Spain from being swept up by the crisis, eurozone leaders also agreed to scale up the EFSF, the 440 billion euro bailout fund they have already used to provide help to Ireland, Portugal and Greece.
Around 250 billion euros remaining in the fund will be leveraged 4-5 times, producing a headline figure of around 1.0 trillion euros, which will be deployed in a variety of ways.
The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of eurozone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks and which is aimed at attracting investment from China and Brazil.
The methods could be combined, giving the EFSF greater flexibility, the eurozone leaders said. But finance ministers are not expected to agree on the nitty-gritty elements of how the scaled-up EFSF will work until some time in November, with the exact date not fixed.
There is also concern about Italian Prime Minister Silvio Berlusconi's commitment to implementing reforms seen as crucial to restore confidence in the bloc's No. 3 economy.
After a summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 percent losses on their Greek debt holdings in the latest bid to reduce Athens' massive debt load to sustainable levels.
Reached after more than eight hours of hard-nosed negotiations among bankers, heads of state and the IMF, the deal also foresees a recapitalization of hard-hit European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility, to give it firepower of 1.0 trillion euros (US$1.4 trillion).
European stocks surged to a 12-week high and the euro shot above US$1.40 to reach its top level against the dollar in seven weeks following the deal. But key aspects of the arrangement, including the mechanics of boosting the EFSF and providing Greek debt relief, could take weeks to pin down, meaning the plan to rebuild confidence after two years of crisis could unravel over the details.
"I see the main risk is that we are left waiting too long again for the implementation of these agreements," European Central Bank policy-maker Ewald Nowotny said yesterday. "Speed is very important here," he told national broadcaster ORF.
Three months ago, eurozone leaders unveiled another agreement that was meant to draw a line under the debt woes that threaten to tear apart the 12-year-old currency bloc. But they realized within weeks that it was inadequate given the depth of Greece's economic problems and their banks' vulnerability.
The new deal aims to address those holes. Under it, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of gross domestic product by 2020, from 160 percent now.
The eurozone will offer "credit enhancements" or sweeteners to the private sector totalling 30 billion euros. The aim is to complete negotiations on the package by the end of the year so Greece has a full, second financial aid program in place before 2012.
The value of that package, EU sources said, would be 130 billion euros -- up from 109 billion euros in the July deal.
"The debt is absolutely sustainable now," Greek Prime Minister George Papandreou said in Brussels after the deal was struck. "Greece can settle its accounts from the past now, once and for all."
In a bid to convince markets that they can prevent larger countries like Italy and Spain from being swept up by the crisis, eurozone leaders also agreed to scale up the EFSF, the 440 billion euro bailout fund they have already used to provide help to Ireland, Portugal and Greece.
Around 250 billion euros remaining in the fund will be leveraged 4-5 times, producing a headline figure of around 1.0 trillion euros, which will be deployed in a variety of ways.
The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of eurozone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks and which is aimed at attracting investment from China and Brazil.
The methods could be combined, giving the EFSF greater flexibility, the eurozone leaders said. But finance ministers are not expected to agree on the nitty-gritty elements of how the scaled-up EFSF will work until some time in November, with the exact date not fixed.
There is also concern about Italian Prime Minister Silvio Berlusconi's commitment to implementing reforms seen as crucial to restore confidence in the bloc's No. 3 economy.
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