Europe deal helps markets to soar

World’s biggest banks bowed to what German Chancellor Angela Merkel called the “last word,” agreeing to write down their Greek government debt by half in the pivotal piece of the euro area’s bid to stem the financial crisis.
The Institute of International Finance, which represents financial companies, agreed to “develop a concrete voluntary agreement on the firm basis of a nominal discount of 50 percent on notional Greek debt held by private investors,” Managing Director Charles Dallara said in a statement e-mailed at 4:26 a.m. in Brussels.
Euro-area leaders who called Dallara into a meeting at about midnight, forcing a break in their 10-hour summit, said that while the bond transaction will be voluntary, the decision resulted from an offer he couldn’t refuse.
“It was the fiercely delivered wish by Merkel, Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of the total insolvency of Greece,” Luxembourg Prime Minister Jean-Claude Juncker told reporters. That “would have cost states a lot of money and would have ruined the banks.”
The euro rose and stocks advanced, with the currency gaining 0.7 percent to $1.4007 at 9:45 a.m. in Brussels. The Stoxx Europe 600 Index surged 2.5 percent and Standard & Poor’s 500 Index futures added 1.6 percent. The Stoxx 600 Banks Index jumped 5.3 percent, the biggest gain since Sept. 27.
Deal Linchpin
The package, negotiated by the umbrella group for more than 450 financial firms, should set the basis for the decline of the Greek debt to gross domestic product ratio with an objective of reaching 120 percent by 2020, the IIF said. The deal with Merkel and French President Nicolas Sarkozy broke a deadlock and came hours after Dallara issued a statement that “there is no agreement on any element of a deal.”
“The details are important, but the fact that 17 euro leaders with all their different agendas managed to reach a deal is encouraging,” said Dirk Becker, a banking analyst at Kepler Capital Markets. “It might seem chaotic, but in the end the Europeans can find a solution, and if not they’ll keep trying.”
The Greek deal paved the way for euro leaders to announce an agreement on boosting the firepower of the rescue fund to 1 trillion euros ($1.4 trillion) and a 106 billion euro- recapitalization of European banks. The second crisis summit in four days delivered tools to extinguish the two-year-old crisis that threatens to ravage Italy and France and brake the world economy.


European markets rallied last night, with the FTSE 100 up 2.5 per cent in early trading and key German and French indices up almost 4 per cent. Wall Street was tipped to follow suit.


The meeting was seen as crucial for the fate of the eurozone, with political leaders working to restore market confidence in the euro and in the creditworthiness of the 17 nations that use the currency.


Investors were also cheered by reports that China, through the International Monetary Fund, was to play a role in the leveraged bailout fund.


The returning appetite for risk sent the Australian dollar to $US1.06 - its highest level since early September.


Officials announced the deal following late night talks in Brussels between leaders of the eurozone and the Institute of International Finance banking lobby.


Sticking points remain, however, with concerns on how much of Greece's debt burden the private sector is willing to share.


It remains unclear if the banks will accept the full 50 per cent write down.


AMP Capital Investors chief economist Shane Oliver said it was "doubtful" the plan would end the debt crisis but it would help avoid a "global financial blow-up" in the coming months.


All about: Luxembourg,  Nicolas Sarkozy,  Angela Merkel,  David Cameron.  Silvio Berlusconi,  Jean-Claude Juncker, Brussels