The difference between German yields and those of Spain and Italy narrowed as the plan to boost Europe’s bailout fund and for bondholders to take 50 percent losses on Greek debt damped demand for safer assets. The cost of insuring European debt from default fell to the least in almost two months. Italian bonds extended gains as the European Central Bank was said to buy the securities. Even after dropping today, Italian and Spanish yields are still higher than at the end of last month.
“The market is taking it positively, that there is some sort of agreement,” said Karsten Linowsky, a Zurich-based fixed-income strategist at Credit Suisse Group AG. “It’s positive for risk sentiment and that is why bund yields are going up sharply.”
German 10-year yields rose 14 basis points, or 0.14 percentage point, to 2.18 percent at 3:34 p.m. London time, after rising as much as 17 basis points, the most since Aug. 8. The 2.25 percent note due September 2021 fell 1.260, or 12.60 euros per 1,000-euro face amount, to 100.620. Two-year rates climbed 11 basis points to 0.63 percent.
Spanish 10-year yields fell 15 basis points to 5.33 percent, down from a euro-era high 6.28 percent set Aug. 2. The spread with similar-maturity bunds narrowed by 29 basis points to 315 basis points. Italy’s 10-year rates dropped six basis points to 5.87 percent, shrinking the premium over bunds by 20 basis points to 369 basis points.
After all the buildup to this summit meeting, failure here would have been regarded as a disaster. While the plan to require banks to raise new capital was generally approved without difficulty — banks will be forced to raise about $150 billion to protect themselves against losses on loans to shaky countries like Greece and Portugal — the negotiations over the Greek debt were difficult.
“The results will be a source of huge relief to the world at large, which was waiting for a decision,” President Sarkozy of France said.
Chancellor Angela Merkel of Germany said: “I believe we were able to live up to expectations, that we did the right thing for the euro zone, and this brings us one step farther along the road to a good and sensible solution.”
In the face of considerable pressure from Europe’s leaders, the banks had been resisting requests that they voluntarily accept a loss of about 50 percent on their Greek loans, far more than the 21 percent agreed to previously. But after months of denying that Greece would have to restructure its large debt, which was trading at 40 percent of face value, European leaders forced the much larger reduction, known as a “haircut,” on the banks, while the International Monetary Fund promised more aid to Greece.
Germany had taken a tougher stance than France with the banks. Mrs. Merkel was willing to think about imposing an involuntary write-down on the private sector, but Mr. Sarkozy remained worried about the consequences on the markets and the banking system.
In a statement, Charles Dallara, managing director of the Institute of International Finance, which represents the major banks, said he welcomed the deal. He called it “a comprehensive package of measures to stabilize Europe, to strengthen the European banking system and to support Greece’s reform effort.”
In a meeting described as crucial for the fate of the euro zone, the leaders had been trying to restore market confidence in the euro and in the creditworthiness of the 17 countries that use it.
In what the leaders saw as an important first step, banks would be required under the recapitalization plan to raise $147 billion by the end of June — enough to increase their holdings of safe assets to 9 percent of their total capital. That percentage is regarded as crucial to assure investors of the banks’ financial health, given their large portfolios of sovereign debt.
All about: Nicolas Sarkozy, Angela Merkel, David Cameron. Silvio Berlusconi, Jean-Claude Juncker
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