Europe seals grand deal to contain debt crisis

Agreement was reached after more than eight hours of hard-nosed negotiations involving bankers, heads of state, central bankers and the International Monetary Fund. It aims to draw a line under spiraling debt problems that have threatened to unravel the European single currency project.


Under the deal, 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 GDP by 2020, from 160 percent now.


At the same time, the euro zone will offer "credit enhancements" or sweetners to the private sector totaling 30 billion euros. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid program in place before 2012.


The value of that package, EU sources said, would be 130 billion euros -- up from 109 billion euros when a deal was last struck in July, an agreement that subsequently unraveled.


"The summit allowed us to adopt the components of a global response, of an ambitious response, of a credible response to the crisis that is sweeping across the euro zone," French President Nicolas Sarkozy told reporters afterwards.


As well as the deal on deeper private sector participation in Greece -- which emerged after Sarkozy and German Chancellor Angela Merkel engaged in the negotiations with bankers -- euro zone leaders also agreed to scale up the European Financial Stability Facility, their 440 billion euro ($600 billion) bailout fund set up last year.


The fund has already been used to provide help to Ireland, Portugal and Greece, leaving around 290 billion euros available. Around 250 billion of that will be leveraged 4-5 times, producing a headline figure of around 1.0 trillion euros, which will be deployed in a variety of ways.


Leaders hope that will be enough to stave off any worsening of the debt problems in Italy and Spain, the region's third and fourth largest economies respectively.


Riskier assets across the board rallied in Asia, with stocks outside Japan up nearly three percent at 0600 GMT (2 a.m. EDT) in response to the agreement. The euro hit a seven-week high.


Earlier, U.S. stocks rallied after news emerged of the intention to boost the power of the EFSF fund.


"It will be a new start for us," said Prime Minister George Papandreou, hailing "a new era, a new chapter" for the country, whose debt woes kicked off a two-year crisis that successively hit Ireland and Portugal before threatening to spill over to the euro area's third and fourth economies, Italy and Spain.
The firepower of the European Financial Stability Facility (EFSF) is to be leveraged up betweeen four- and fivefold using clever financial footwork to avoid governments increasing guarantees.
With the world on tenterhooks, emerging powers China and Russia waded in with offers to help Europe safeguard the global economy by contributing to the fund.
The development came as global powers, from the United States to Japan and China, pressed European leaders to come up with a lasting solution to the debt crisis before a G20 summit in France on November 3 and 4.
Europe's leaders agreed two options to boost the EFSF without increasing commitments from member states as taxpayers in countries such as Germany complain about pouring money down what they see as a bottomless hole.
The first option allows the EFSF to provide risk insurance on new debt issued by fragile governments, in a bid to convince investors to continue buying their bonds and keep interest rates low.
A second fund, linked to the EFSF, will be created to attract private and public investors, including countries outside the eurozone. This investment vehicle could also be associated with the International Monetary Fund, an idea Russia has said it prefers.
With fears growing that the debt drama will turn into a banking system meltdown, European leaders also struck a deal to force banks to recapitalise at a summit of the 27-nation EU that preceded the eurozone talks.
"We made good progress on the bank recapitalisation, that wasn't watered down, it now has been agreed," said British Prime Minister David Cameron.
The European Banking Authority said banks would need 106 billion euros to fulfill the requirements.
With fears of contagion hitting Italy, Prime Minister Silvio Berlusconi came to the summit with a detailed list of pledges to cut his country's 1.9-trillion-euro debt.
Van Rompuy said leaders welcomed the vows but called on Rome to "abide" by its commitments.



All about: Nicolas Sarkozy,  Angela Merkel,  David Cameron.  Silvio Berlusconi