Hard-won euro debt deal wins kudos

October 27, 2011 9:24 AM0 commentsViews: 15

Hard-won euro debt deal wins kudos

World leaders offered praise as markets turned euphoric Thursday over Europe’s hard-won debt deal to save the euro area and the global economy from recession.

As European Union leaders, often accused of doing too little too late, finally clinched a grand plan to bring the euro back from the brink, markets soared from Hong Kong to New York and the single currency hit a seven-week high against the dollar.

With the global economy stalling, Europe has been under pressure to tame a two-year debt crisis seen spinning out of control in the 17 nations sharing the currency, threatening major economies Italy and Spain.

“The European fix is in,” said Patrick O’Hare of Briefing.com after Europe’s leaders emerged from marathon talks with a masterplan including a trillion-euro rescue fund, a new bailout for Greece, and a deal squeezing banks and private investors to share the burden of the debt crisis.

“Market participants appear to be pleased with what they have heard, even though it isn’t exactly a plan where all the i’s have been dotted and the t’s have been crossed,” he added.

As New York opened higher and London gained almost three percent, China and Japan offered words of support.

President Hu Jintao told French counterpart Nicolas Sarkozy that the package boded well to help Europe, China’s leading trade partner, to “stabilise financial markets, overcome difficulties.”

“We have done what needed doing,” said German Chancellor Angela Merkel.

Emerging giants China and Russia have vowed to pitch in to Europe’s rescue war-chest as the old continent holds out a hand for help — a notion that raises hackles in some quarters.

There were also words of warning to euro nations to keep their house in order with the new deal — no more back sliding.

“Emerging economies should not be seen as the EU’s good samaritans — in the end the EU has to pull itself out of the crisis,” said China’s official Xinhua news agency.

In Frankfurt, banks poised to take a 50 percent loss on their Greek debt exposure under the deal, issued a similar message.

“EU leaders have proven they can act,” said the powerful German banking federation BdB. “It is now up to the politicians to keep the pressure on Greece and other troubled eurozone countries to reform.”

As talks dragged on for almost 10 hours overnight in Brussels, the last and perhaps toughest chapter was the deal struck with the Institute of International Finance grouping the banks to force private investors to take their share of the debt pain.

In signs of backroom drama, Sarkozy and Merkel broke off from the summit talks to save the day in person by cutting a deal with the head of the banking lobby, Charles Dallara.

“We said it was our last word, our last offer,” said Merkel of threats to allow Greece to default failing an agreement with the banks.

The agreement was welcomed as “historic” in Greece as it will slice a whopping 100 billion euros off its overwhelming 350-billion-euro debt pile.

In addition, eurozone leaders agreed a new Greek bailout to replace a 109-billion loan package agreed in July. It would be worth up to 100 billion euros until 2014, and should be agreed by the end of the year.

“Not only the future of Greece but the future of Europe was at stake,” said Deutsche Bank chief Josef Ackermann after negotiating the write-down in his role as chairman of the IIF.

To address that danger, eurozone leaders agreed to boost their debt rescue fund, the European Financial Stability Facility (EFSF), to one trillion euros.

Its firepower will be multiplied four to fives times, using clever financial footwork to avoid increasing commitments from countries as taxpayers in EU nations such as Germany complain of pouring money into a bottomless hole.

The EFSF will provide risk insurance on new bonds issued by fragile governments in a bid to reassure investors and encourage them to continue to invest in their bonds.

A second fund, linked to the EFSF, will be created to attract private and public investors, including the likes of China and Russia. The investment vehicle might also be routed via the International Monetary Fund.

With fears growing that the debt drama would sink the banking system, European leaders also agreed to force banks to recapitalise. The European Banking Authority says banks would need 106 billion euros to meet new capital requirement levels.

With fears of contagion hitting Italy, Prime Minister Silvio Berlusconi came to the summit offering pledges to cut his country’s 1.9-trillion-euro debt but was warned by EU leaders he “must abide” by the pledges.

But at home, the fragility of his coalition government raised fears that his promises to implement the measures would “stay just words on paper and be used to buy time,” as the Corriere della Sera daily wrote.

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