European leaders have clinched a deal they hope will mark a turning point in their two-year debt crisis, agreeing after a night of tense negotiations to have banks take bigger losses on Greece’s debts and to boost the region’s weapons against the market turmoil.
After months of dawdling and half-baked solutions, the leaders had been under immense pressure to finalize their plan to prevent the crisis from pushing Europe and much of the developed world back into recession and to protect their currency union from unraveling.
World stock markets surged higher yesterday on the news. Oil prices rose above US$92 per barrel, while the euro gained strongly — a signal investors were relieved at the outcome of the contentious negotiations.
“We have reached an agreement, which I believe lets us give a credible and ambitious and overall response to the Greek crisis,” French President Nicolas Sarkozy told reporters.
Sarkozy later called Chinese President Hu Jintao (胡錦濤) and pledged to cooperate to revive global growth, but there was no word on whether Beijing might contribute to Europe’s bailout fund.
The fund’s chief executive is due to visit Beijing today to talk to potential investors. Beijing has expressed sympathy for the EU, its biggest trading partner, but has yet to commit any cash.
The strategy unveiled after 10 hours of negotiations focused on three key points. These included a significant reduction in Greece’s debts, a shoring up of the continent’s banks, partially so they could sustain deeper losses on Greek bonds, and a reinforcement of a European bailout fund so it can serve as a 1 trillion euro (US$1.39 trillion) firewall to prevent larger economies like Italy and Spain from being dragged into the crisis.
After several missed opportunities, hashing out a plan was a success for the 17-nation eurozone, but the strategy’s effectiveness will depend on the details, which will have to be finalized in the coming weeks.
The most difficult piece of the puzzle proved to be Greece, whose debts the leaders vowed to bring down to 120 percent of its GDP by 2020. Under current conditions, they would have ballooned to 180 percent.
To achieve that massive reduction, private creditors like banks will be asked to accept 50 percent losses on the bonds they hold. The Institute of International Finance, which has been negotiating on behalf of the banks, said it was committed to working out an agreement based on that “haircut,” but the challenge now will be to ensure that all private bondholders fall in line.
It said the 50 percent cut equals a contribution of 100 billion euros to a second rescue for Greece, although the eurozone promised to spend about 30 billion euros on guaranteeing the remaining value of the new bonds.
The full program is expected to be finalized by early December and investors are supposed to swap their bonds in January, at which point Greece is likely to become the first euro country ever to be rated at default on its debt.
“We can claim that a new day has come for Greece, and not only for Greece but also for Europe,” Greek Prime Minister George Papandreou said. “A burden from the past has gone, so that we can start a new era of development.”
Not all Greeks were convinced. Prominent left-wing deputy Dimitris Papadimoulis said the agreement would doom Greeks to a deeper recession.
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