ibnlive » Business

Oct 27, 2011 at 10:35am IST

Debt crisis: EU leaders reach bailout agreement

New Delhi: Another financial crisis was averted in Europe as the European Union leaders reached a bailout agreement after a marathon brainstorming session.

The agreement included a hard-fought deal with private sector investors to write down Greek bonds by 50 per cent.

The agreement came at the end of a marathon round of talks to finalise the details of a comprehensive policy response to the government debt and banking problems threatening the stability of the euro currency and global economy.

The deal struck included 50 per cent writedown for private bondholders. Earlier, EU leaders brainstomred and discussed plans to prop up European banks, ease the debt burden on Greece and enlarge the bailout fund meant to prevent major economies such as Italy falling into crisis.

Fears of a failure in talks meant that the International Monetary Fund might have had to support the eurozone.

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 personally 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.

The EFSF will be leveraged in two ways, either by offering insurance, or first-loss guarantees, to purchasers of euro zone 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 euro zone leaders said.

"The leverage could be up to one trillion (euros) under certain assumptions about market conditions and investors' responsiveness in view of economic policies," said Herman Van Rompuy, the president of the European Council.

"There is nothing secret in all this, it is not easy to explain but we are going to more with our available money, it is not that spectacular. Banks have been doing this for centuries, it has been their core business, with certain limits."

(With Additional Inputs from Reuters)