EU leaders reach a deal to tackle debt crisis
BERLIN -- Banks agreed this morning to take half of what they are owed by Greece as part of a deal brokered by European leaders to solve the continent's debt crisis and prevent it from igniting a new global financial meltdown.
The strategy that emerged after 10 hours of negotiations focused on three key points:
• Significant reduction in Greece's debts.
• Shoring up the continent's banks, partly so they can sustain the deeper losses on Greek bonds.
• Reinforcement of a European bailout fund so it can serve as a euro1 trillion ($1.39 trillion) firewall to prevent larger economies like Italy and Spain from being dragged into the crisis.
World stock markets surged higher Thursday on the news. Oil prices rose above $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 after the meeting ended early Thursday. "Because of the complexity of the issues at stake, it took us a full night. But the results will be a source of huge relief worldwide."
The deal with private creditors would significantly cut the debt problems of Greece, whose descent toward bankruptcy started the crisis that threatens to engulf the entire European Union.
"These are exceptional measures for exceptional times. Europe must never find itself in this situation again," European Commission President José Manuel Barroso said after the meetings.
Washington was closely watching the talks, which if unsuccessful could cause economic instability in the United States and elsewhere.
"We have made clear that we believe that the Europeans have the financial capacity to deal with this challenge and they need to meet that capacity with political will," White House press secretary Jay Carney said Wednesday.
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 days.
The most difficult piece of the puzzle proved to be Greece, whose debts the leaders vowed to bring down to 120% of its GDP by 2020. Under current conditions, they would have ballooned to 180%.
To achieve that massive reduction, private creditors like banks will be asked to accept 50% 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.," The challenge now will be to ensure that all rivate bondholders fall in line.
It said the 50% cut equals a contribution of euro100 billion ($139 billion) to a second rescue for Greece, although the eurozone promised to spend some euro30 billion ($42 billion) on guaranteeing the remaining value of the new bonds.
The full program is expected to be final 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," said Greek Prime Minister George Papandreou, whose country's troubles touched off the crisis two years ago. "Let's hope the worst is over."
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