Euro deal leaves much to do on rescue fund, Greek debt

BRUSSELS, (Reuters) – Euro zone leaders struck a  last-minute deal yesterday 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 today 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 today. “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.