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

Eurozone leaders struck a last-minute deal on Thursday 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.
---- Eurozone, banks agree to 50pc private sector losses on Greek bonds
---- Details of deal to be finalised by the end of the year: EU
---- Eurozone says to scale up EFSF bailout fund to 1.0 trillion
Economists polled by Reuters on Thursday 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).
Three months ago, eurozone 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.
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 eurozone 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. In a bid to convince markets that they can prevent larger countries like Italy and Spain from being swept up by the crisis, eurozone 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 eurozone 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 eurozone 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. French President Nicolas Sarkozy spoke by phone with Chinese President Hu Jintao on Thursday.
"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. As with the July 21 agreement, 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).