Agreement to finally draw line under crisis

EUROPE and its troubled currency appears to be finally reaping the rewards of a litany of summits this year designed to draw a line under the region’s debt crisis.

Markets have reacted positively, while US President Barack Obama heaps praise on EU leaders for getting a deal.

Yesterday Brussels recovered from the hubbub of motorcades and tense meetings as marathon talks to recapitalise banks, prevent a Greek default, and agree on a €1 trillion rescue package for the entire bloc finally came to an end at 4am.

Though many similar meetings to prevent a global recession have been dubbed historic, the session yesterday appears to have the desired effect as markets rallied and the euro reached a seven-week high.

President Obama said yesterday that EU leaders had laid “a critical foundation” to solve the debt crisis.

“We look forward to the full development and rapid implementation of their plan,” Obama said in a statement released by the White House.

In intense talks between EU officials and the Institute of International Finance, banks finally agreed to take a 50% cut in their holdings of Greek sovereign debt.

To win over reluctant bondholders, the EU agreed to a €30 billion sweetener to alleviate their writedowns.

The money would be coming both from the European Financial Stability Facility and from money made on the privatisation of Greek state assets.

The EFSF was finally leveraged to €1 trillion and perhaps more from the remaining €250 billion in the fund.

The fund will be getting its extra firepower from guarantees attached to sovereign debt and the option of an IMF-backed Special Purpose Vehicle to buy sovereign debt and recapitalise banks.

Reports that China would also step in to help fund an SPV helped lift investor sentiment.

However, British government sources warned that getting large emerging economies to effectively bail out the eurozone would not inspire the kind of market confidence the euro needs.

China’s involvement is no fait accompli even after Nicolas Sarkozy reportedly went on a charm offensive in a phone call to Hu Jin Tao yesterday.

The head of the euro zone’s financial assistance fund, Klaus Regling, will travel to China today for talks with EFSF bondholders about the prospect of further investment.

Key elements

Screens showing graphs of stocks at the Athens Stock Exchange. Greek shares rose sharply following the new European debt relief deal. Picture: AP

HERE is a rundown of the agreements forged at the EU summit:

* Banks in the EUmust raise €106 billion of capital by the end of June 2012. The hope is that if there are any defaults by governments, they will be protected. It will also give a level of protection to vulnerable countries such as Spain and Italy.

* Thanks to pressure exerted on them by German Chancellor Angela Merkel and French President Nicolas Sarkozy when they joined the talks yesterday, banks holding Greek debt will face a 50% loss on their holdings as opposed to the 40% which was initially offered by the banks.

* They will get a €30bn sweetener from the EFSF and Greece’s privatisation programme to alleviate losses.

* Leaders agreed to stump up another €100bn in EFSF funding for Greece’s capital shortfalls. The aim is to lower Greece’s debt to GDP ratio to 120% by 2020.

* Banks must have minimum capital reserves of 9% by June 2012. That is lower than the 10.5% limit set for Irish banks in March.

* The amount available to the rescue fund, the European Financial Stability Facility is to rise to over €1 trillion. (The EFSF was originally at €440bn, but after bailing out Greece, Ireland and Portugal, between €250bn and €275bn remains). The framework for the new fund is expected to be in place by November.

* It is anticipated that this will be achieved by either offering insurance to purchasers of eurozone members’ debt, thereby making their bonds more attractive to investors, or by setting up a special investment scheme, which large-scale private and public investors could contribute to. China will be one of the countries who will be approached.

* The IMF will not be able to invest directly in the fund — its remit only allows it to give money directly to countries, as, for instance, it has done with Greece.