European Leaders Make Deal

Online, November 2, 2011 (Newswire.com) - European leaders have agreed on a trio of measures to bring the eurozone crisis to an end. The agreement was reached after more than eight hours of negotiations involving bankers, heads of state, central bankers and the International Monetary Fund. It aims to draw a line under spiralling debt problems that have threatened to unravel the European single currency project. Under the deal, 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 GDP by 2020, from 160 percent now. Banks must also raise more capital to protect them against losses resulting from any future government defaults. The deal is aimed at preventing the crisis spreading to larger eurozone economies like Italy, but the leaders said work still needed to be done. It also approved a mechanism to boost the eurozone's main bailout fund to about 1 trillion euros.

The euro zone will offer "credit enhancements" or sweeteners to the private sector totalling 30 billion euros. The value of that package, EU sources said, would be 130 billion euros - up from 109 billion euros when a deal was last struck in July, an agreement that subsequently unravelled. 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. As well as the deal on deeper private sector participation in Greece - which emerged after Sarkozy and German Chancellor Angela Merkel engaged in the negotiations with bankers - euro zone leaders also agreed to scale up the European Financial Stability Facility, their 440 billion euro ($600 billion) bailout fund set up last year. 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.

Investors around the world gave a nod of approval, buying shares and pushing up markets. European and Asian markets made gains, with the FTSE 100 up 1.82% or 101 points at 5,654. Although the initial response has been positive, there is little doubt that much remains to be done. Riskier assets across the board rallied in Asia, with stocks outside Japan up nearly 3% at 0600 GMT (2 a.m. EDT) in response to the agreement. The euro hit a seven-week high. Earlier, U.S. stocks rallied after news emerged of the intention to boost the power of the EFSF fund, the Dow gaining 162 points, or 1.39%, to 11,869, while the S&P 500 Index rose 13 points, or 1.05%.