Debt crisis: Europe seals grand deal

2011-10-27 08:04

Brussels - Europe sealed a grand deal on Thursday to fix its festering debt crisis, shoring up its bailout fund, pledging new funds for Greece and persuading banks to share the pain at a summit vital to the health of the global economy.

After days of talks and two successive summits that dragged on for almost 10 hours as markets and world leaders remained on tenterhooks, EU president Herman Van Rompuy emerged in the wee hours saying: "We took important decisions."

As markets firmed in Asia, IMF chief Christine Lagarde welcomed "substantial progress", but European Central Bank chief Jean-Claude Trichet warned that "all of this now requires a lot of work and a lot of quick work."

The last and perhaps toughest chapter in the four-point plan was a deal between eurozone leaders and the Institute of International Finance banking lobby to force private investors to take a 50% loss on Greece's debt.

French President Nicolas Sarkozy and German Chancellor Angela Merkel broke off from the summit to save the day and cut a deal with the head of the banking lobby, Charles Dallara of the Institute of International Finance.

"We said it was our last word, our last offer," said Merkel of threats to allow Greece to default failing agreement.

"We have done what needed doing," she said.

New start

The banks in past weeks had raised their offer to 40% but governments insisted on a 50% "haircut".

The deal aims to slice a whopping €100bn off the €350bn debt pile hampering Greece, which also won new pledges of a €100bn loan over the next three years.

"It will be a new start for us," said Prime Minister George Papandreou, hailing "a new era, a new chapter" for the country, whose debt woes kicked off a two-year crisis that successively hit Ireland and Portugal before threatening to spill over to the euro area's third and fourth economies, Italy and Spain.

To address that danger, eurozone leaders agreed to boost their debt rescue fund to one trillion euros.

The firepower of the European Financial Stability Facility (EFSF) is to be leveraged up betweeen four- and fivefold using clever financial footwork to avoid governments increasing guarantees.

With the world on tenterhooks, emerging powers China and Russia waded in with offers to help Europe safeguard the global economy by contributing to the fund.

The development came as global powers, from the United States to Japan and China, pressed European leaders to come up with a lasting solution to the debt crisis before a G20 summit in France on November 3 and 4.

Europe's leaders agreed two options to boost the EFSF without increasing commitments from member states as taxpayers in countries such as Germany complain about pouring money down what they see as a bottomless hole.

The first option allows the EFSF to provide risk insurance on new debt issued by fragile governments, in a bid to convince investors to continue buying their bonds and keep interest rates low.

Fears growing

A second fund, linked to the EFSF, will be created to attract private and public investors, including countries outside the eurozone. This investment vehicle could also be associated with the International Monetary Fund, an idea Russia has said it prefers.

With fears growing that the debt drama will turn into a banking system meltdown, European leaders also struck a deal to force banks to recapitalise at a summit of the 27-nation EU that preceded the eurozone talks.

"We made good progress on the bank recapitalisation, that wasn't watered down, it now has been agreed," said British Prime Minister David Cameron.

The European Banking Authority said banks would need €106bn to fulfil the requirements.

With fears of contagion hitting Italy, Prime Minister Silvio Berlusconi came to the summit with a detailed list of pledges to cut his country's 1.9-trillion-euro debt.

Van Rompuy said leaders welcomed the vows but called on Rome to "abide" by its commitments.

  • marco.tomaso - 2011-10-27 08:34

    French President Nicolas Sarkozy said yesterday he'll ask Chinese President Hu Jintao to help Europe and bail them out.China can obviously afford to do so as it has the world’s largest foreign currency reserves at more than $3.2 trillion. The EFSF said they'll sell European bonds so as to "finance loans for distressed euro nations",but who in their right mind would wanna buy Greece or Italian or Spanish or Portugese bonds?Greece is broke and bankrupt we all know that so the Greeks will default on their sovereign debt,and now the French wants China to bail the EURO out. China Investment Corp has a $300 billion sovereign wealth fund and hold large amounts of euro-denominated assets.

  • TaSaqz - 2011-10-27 09:04

    Why is the Euro not affected by all this?

  • MissGremlin - 2011-10-27 11:31

    If this were being run as a business, it would have been shut down by now. How much longer can they sustain losses of this magnitude? Clearly, the Eurozone concept is running at a massive loss, and is not a viable concept!

  • Tony - 2011-10-27 17:31

    This is what was needed from the start. Creditors take a knock because they gave credit when it was not due and the countries themselves take a knock through austerity measures. This is a much better strategy than allowing Greece to default.

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