Shares, Euro rise after the agreement. Banks holding Greek debt accept a 50 per cent write-off, eurozone bailout fund will be boosted with investment from China, Brazil and Middle East countries, and banks will have to raise more capital.
After lengthy negotiations, European leaders late on Wednesday night reached a “three-pronged” agreement described as vital to solve the region’s huge debt crisis, according to the BBC. They said banks holding Greek debt accepted a 50% loss, the eurozone bailout fund will be boosted and banks will have to raise more capital. The agreement is aimed at preventing the crisis spreading to larger eurozone economies like Italy, but the leaders said work still needed to be done.
After marathon talks in Brussels, they agreed a mechanism to boost the eurozone’s main bailout fund to about EUR 1 trillion. Banks must also raise more capital to protect them against losses resulting from any future government defaults. The framework for the new fund is to be put in place in November.
Because banks have agreed to shoulder losses on Greek bonds, the country’s burden has been reduced, cutting its debt by EUR 100 bln, down to 120% of its gross domestic product by 2020. Greek Prime Minister George Papandreou hailed the deal, saying: “We can claim that a new day has come for Greece, and not only for Greece but also for Europe.” The eurozone leaders also said the firepower of the main euro bailout fund – known as the European Financial Stability Facility (EFSF) – would be boosted from the current EUR 440 bln to about EUR 1 trillion. This will be achieved through a “special investment vehicle” designed to lure investment from China, Brazil and Middle East countries, according to Euractiv. A definitive agreement on the EFSF’s full size will, however, not be finalised until late November. China has already expressed interest in backing the special investment mechanism, CNN said.
Bank recapitalisation, the third key element of the package, had been agreed earlier on Wednesday. The banks would now be required to raise about EUR 106 bln in new capital by June 2012, and governments may have to step in despite the unpopularity of further bank bail-outs. It is hoped that this would help shield them against losses resulting from any government defaults and protect larger economies – like Italy and Spain – from the market turmoil, according to the BBC.
Meanwhile EU leaders welcomed the deal and Italian Prime Minister Silvio Berlusconi’s pledge to balance his country’s budgets and implement reforms to bring down its EUR 1.9 trillion debt.
“The eurozone has adopted a credible and ambitious response to the debt crisis,” a visibly tired French President Nicolas Sarkozy said at a news conference early Thursday morning in the Belgian capital.
“Europe is closer to resolving its financial and economic crisis,” said Jose Manuel Barroso, president of the European Commission, in a report later to the European Parliament. “We are showing that we can unite in the most difficult of times.”
In his turn, EU President Herman Von Rompuy hailed the deal and spelled out some of its details. “We fostered confidence in the European banking sector. We approved a coordinated scheme to re-capitalise banks across Europe,” he said, according to Voice of America. “The ratio of the highest quality capital will be increased to nine percent. This will enable banks to withstand shocks important in the current exceptional circumstances.”
German Chancellor Angela Merkel, who was a key negotiator in thrashing out the deal, said: “I think we were able to meet expectations and we have done what needed doing” for the euro. IMF chief Christine Lagarde, who was also at the Brussels summit, said she was “encouraged by the substantial progress made on a number of fronts”.
Euro at seven-week high
The Euro jumped to a seven-week high against the dollar and gained strongly against the yen after European leaders reached the deal, according to Wall Street Journal. Asian stocks also rose to the highest level in six weeks, while in Europe, banking shares rallied the most.
The benchmark Stoxx Europe 600 index was recently up 2.5% at 246.89, London’s FTSE 100 index was 2.1% higher at 5670.95, Frankfurt’s DAX gained 3.7% at 6235.91, and Paris’s CAC-40 added 3.8% at 3288.19. The Stoxx Europe 600 index for the banking sector rose 5.9%. French banks rallied the most, as they have been weighed down over worries about the extent of their Greek debt exposure.