BRUSSELS - Euro zone leaders struck a last-minute deal on Thursday to contain the currency bloc's two-year-old debt crisis but are now under pressure to finalise the details of their plan 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 cut Athens’ 360 billion euro debt load to sustainable levels.
Economists polled by Reuters on Thursday were split down the middle over whether the writedown was big enough, with 24 of 47 saying it wasn’t and the remainder saying it was.
Reached after more than eight hours of hard-nosed negotiations between bankers, heads of state and the IMF, the deal also foresees a recapitalisation of hard-hit European banks and a leveraging of the bloc’s rescue fund, the European Financial Stability Facility (EFSF), to give it firepower of 1.0 trillion euros ($1.4 trillion).
U.S. stocks surged more than 2 percent in early trade and European shares climbed 4 percent to a 12-week high on the deal. They were led higher by banks which raced up over 9 percent, with BNP , Societe Generale and Credit Agricole of France leading the way.
The euro shot above $1.41 to reach its top level against the dollar in seven weeks.
But key aspects of the deal, including the mechanics of boosting the EFSF and providing Greek debt relief, could take weeks or even months to pin down, raising the risk of the plan unravelling as the last one did.
"I see the main risk is that we are left waiting too long again for the implementation of these agreements," European Central Bank policymaker Ewald Nowotny said on Thursday. "Speed is very important here," he told national broadcaster ORF.
Three months ago, euro zone 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.
In a matter of weeks they realised it was inadequate given the depth of Greece’s economic problems and the vulnerability of European banks.
The new deal aims to address these holes.
"ABSOLUTELY SUSTAINABLE"
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 euro zone will offer 30 billion euros in "credit enhancements" or sweeteners to the private sector to get them on board. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid programme 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.
A top lawyer for the International Swaps and Derivatives Association said that because banks had agreed to accept the losses, the deal was unlikely to trigger a "credit event" under which credit default swaps (CDS), or default insurance contracts, would have to be paid out.
In a bid to convince markets that they can prevent larger countries like Italy and Spain from being swept up by the crisis, euro zone leaders also agreed to scale up the EFSF, the 440 billion euro bailout fund they created in May 2010 and have already used to provide aid 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.
The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of euro zone 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 euro zone leaders said.
But EU 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.
Another question mark is Italian Prime Minister Silvio Berlusconi’s commitment to implementing reforms seen as crucial for restoring confidence in the bloc’s third largest economy.
Dogged by scandals, Berlusconi has promised to raise the retirement age to 67 by 2026 and attempt other reforms, but the EU is reserving judgement after repeated backsliding from Rome in recent months.
SARKOZY TALKS TO HU
French President Nicolas Sarkozy spoke by phone with Chinese President Hu Jintao on Thursday.
Beijing is a big holder of European sovereign debt and an EU source told Reuters the conversation would centre on Beijing’s possible participation in the bailout fund.
"China hopes all these measures will help stabilise the European financial market and conquer the current difficulties and promote the economic recovery and development," Hu said, according to China’s state television.
Japan and Canada welcomed the euro zone agreement. Earlier, China’s official Xinhua news agency had said the outcome of the summit was "positive but filled with difficulties".
As with the July 21 agreement, the concern is that Thursday’s deal will only work if the fine print can be promptly agreed with the private sector, represented by the Institute of International Finance (IIF).
Charles Dallara, the managing director of the IIF, said those he represented were committed to making the deal work.
"We believe (bank take-up) is likely to be very, very high," Dallara said on Thursday. "All parties recognised not only that the future of Greece but also the future of Europe and the future of the world economy was at stake."
Alongside the hit to the private sector, euro zone leaders agreed the banking sector needs recapitalising to the tune of around 106 billion euros.
"While the headlines look good, the devil is in the details," said Damien Boey, equity strategist at Credit Suisse in Sydney. "We don’t actually know how they are planning to increase the bail-out fund size from 440 billion euros to a trillion. On top of that, there are some questions as to whether one trillion euros in itself is enough."
There were corporate doubters, too. Oil giant Royal Dutch Shell said it planned to curb its investments in the European Union in future due to doubts about the bloc’s chances of recovering from the crisis.
"Europe’s macroeconomic position can only recover and the sovereign debt crisis can only be addressed through underlying economic growth," Simon Henry, chief financial officer, told reporters on a conference call on Thursday.
"We do not see the European Union creating the conditions for that, in fact quite the opposite," he said.
