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Europe strikes deal on Greece, bailout

Posted on October 28, 2011

BRUSSELS -- Euro zone leaders struck a deal with private banks and insurers on Thursday for them to accept a 50% loss on their Greek government bonds under a plan to lower Greece’s debt burden and try to contain the two-year-old euro zone crisis.

The agreement was reached after more than eight hours of hard-nosed negotiations involving bankers, heads of state, central bankers and the International Monetary Fund.

It aims to draw a line under spiraling 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% cut in its bond investments to reduce Greece’s debt burden by €100 billion, cutting its debts to 120% of gross domestic product (GDP) by 2020, from 160% now.

At the same time, the euro zone will offer “credit enhancements” or sweeteners to the private sector totalling €30 billion.

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.

The value of that package, EU sources said, would be €130 billion -- up from €109 billion when a deal was last struck in July, an agreement that subsequently unravelled.

“The summit allowed us to adopt the components of a global response, of an ambitious response, of a credible response to the crisis that is sweeping across the euro zone,” French President Nicolas Sarkozy told reporters afterwards.

As well as the deal on deeper private sector participation in Greece -- which emerged after Mr. Sarkozy and German Chancellor Angela Merkel engageD bankers in negotiations -- euro zone leaders also agreed to scale up the European Financial Stability Facility (EFSF), their €440-billion bailout fund set up last year.

The fund has already been used to provide help to Ireland, Portugal and Greece, leaving around €290 billion available.

Around €250 billion of that will be leveraged 4-5 times, producing a headline figure of around €1 trillion, which will be deployed in various ways.

Leaders hope that will be enough to stave off any worsening of the debt problems in Italy and Spain, the region’s third and fourth largest economies respectively.

Riskier assets across the board rallied in Asia, with stocks outside Japan up nearly 3% in response to the agreement. The euro hit a seven-week high.

Earlier, US stocks rallied after news emerged of the intention to boost the power of the EFSF fund.

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.

“The leverage could be up to €1 trillion under certain assumptions about market conditions and investors’ responsiveness in view of economic policies,” said Herman Van Rompuy, the president of the European Council.

“There is nothing secret in all this, it is not easy to explain, but we are going to [do] more with our available money; it is not that spectacular. Banks have been doing this for centuries, it has been their core business, with certain limits.”

As with the July 21 agreement, which quickly broke down when it became difficult to secure sufficient private sector involvement and market conditions rapidly worsened, the concern is that Thursday’s deal will only work if the fine print can be promptly agreed with the private sector, represented by the Institute of International Finance (IIF).

Charles Dallara, managing director of the IIF, said those he represented were committed to making the deal work.

“On behalf of the private investor community, the IIF agrees to work with Greece, euro area authorities and the IMF to develop a concrete voluntary agreement on the firm basis of a nominal discount of 50% on notional Greek debt held by private investors with the support of a €30-billion official... package,” he said in a statement.

“The specific terms and conditions of the voluntary PSI (private sector involvement) will be agreed by all relevant parties in the coming period and implemented with immediacy and force. The structure of the new Greek claims will need to be based on terms and conditions that ensure (net present value)loss for investors fully consistent with a voluntary agreement.”

Euro zone leaders will be hoping the agreement, which will also be accompanied by a recapitalization of the European banking sector by around €106 billion, will finally draw a line under a crisis that has roiled financial markets and threatened to tear apart the euro single currency project.

“While the headlines look good, the devil is in the details,” said Damien Boey, equity strategist at Credit Swisse in Sydney.

“It’s great news that they’ve managed to increase the bail-out fund to €1 trillion, plus agree on some sort of haircut arrangement for the private investors in Greek debt.

“The problem is, we don’t actually know how they are planning to increase the bail-out fund size from €440 billion to a trillion. On top of that, there are some questions as to whether €1 trillion in itself is enough.”

Jose Manuel Barroso, the president of the European Commission, said the final details on the Greek package, which follows a program of €110 billion of loans granted to the country last year, would only be worked out by yearend.

And EU finance ministers are not expected to agree on the nitty-gritty elements of how the scaled-up EFSF will work until sometime in November, with the exact date not fixed.

As part of efforts to attract investors into the special purpose vehicle attached to the EFSF, Mr. Sarkozy said he would talk to Chinese President Hu Jintao in the coming days.

Beijing has so far been a big buyer of bonds issued by the EFSF, which is triple-A rated by credit agencies.

As well as the three-way package to strengthen their crisis-fighting powers and try to resolve the situation in Greece, euro zone leaders called on Italy to take more rapid action on pension reforms and other structural measures to try to avoid the economy heading the same way as Greece.

Prime Minister Silvio Berlusconi has promised to raise the retirement age to 67 by 2026, and pursue other adjustments to the country’s economic model, steps the EU praised but said would be positive only if they were implemented. “The key is implementation. This is the key. It is not enough to make commitments; it is necessary now to check if they are really implementing,” said Mr. Barroso. -- Reuters

Breakthrough raises hopes for stability; but just a ‘first step’

THE LAST-MINUTE agreement yesterday between leaders of the European Union (EU) and banks that provided ingredients for a way out of the debt crisis is a “first important step” that buys time to repair troubled economies, World Bank President Robert B. Zoellick told reporters during a briefing in Pasig City.

Local markets cheered news of the deal, with the Philippine Stock Exchange index climbing 1.01% or 42.74 points to 4,267.50 and the peso strengthening by about 36 centavos to close at P42.850 to the US dollar from P43.205 at the end of trading last Wednesday.

Philippine officials also welcomed the deal -- whose details have to be hammered out towards yearend -- saying separately that it raises hopes stability will eventually return to global markets that, in turn, will give government more space in conducting fiscal and monetary policy.

“I am hopeful that this first important step can lead to a broader approach in helping the world economy resume growth,” Mr. Zoellick said in a briefing.

But he said euro zone leaders needed to make more difficult decisions.

“Problems cannot be solved by waving a magic wand,” Mr. Zoellick stressed.

“It will require follow-through,” he added.

“This basically buys time and you will have to use build some of the foundations for growth.”

Asked what those steps should be, Mr. Zoellick said euro zone countries needed to make the same structural reforms undertaken by East Asian economies that helped them recover from the Asian financial crisis in the late-1990s.

These steps included tax reforms to broaden governments’ revenue base, opening markets to competition in order to raise productivity and building infrastructure.

An while governments cannot avoid macroeconomic issues like budget deficits, “there’s still a lot of people out there without jobs,” Mr. Zoellick said, noting the euro zone crisis has started to affect developing markets.

Philippine officials chimed in, saying they hoped the deal would pave the way for a definitive solution.

“If the environment outside is more benign as a result of the European Union’s debt agreement, it will give more stability to the Philippines,” Finance Secretary Cesar V. Purisima said at the sidelines of the Philippine Investment Summit for Global Fund Managers 2011 held yesterday in Makati City.

“We can have more policy options now. If times are tough, we tend to tighten policies. But now, we can be more aggressive with policy choices,” Mr. Purisima explained.

But he urged EU authorities to follow-through will more concerete measures. “This debt agreement is a very good start, but this is not the end of the problem yet,” Mr. Purisima said.

Bangko Sentral ng Pilipinas Governor Amando M. Tetangco, Jr. agreed, cautioning in a text message: “The agreements are comprehensive but require the cooperation of the European leaders, multilateral agencies...and the private sector.”

“This confidence is vital in ensuring speedy normalization in the markets...But as they say, the proof of the pudding is in the eating.” -- reports from AFP, D. C. J. Jiao and N. J. C. Morales