Thursday, October 27, 2011

Europe Agrees to Greek Debt Deal

From the NY Times

European leaders, in a significant step toward resolving the euro zone financial crisis, early Thursday morning obtained an agreement from banks to take a 50 percent loss on the face value of their Greek debt.

The leaders agreed on Wednesday on a plan to force the Continent’s banks to raise new capital to insulate them from potential sovereign debt defaults. But there was little detail on how the Europeans would enlarge their bailout fund to achieve their goal of $1.4 trillion to better protect Italy and Spain.

After all the buildup to this summit meeting, failure here would have been 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.
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.
The overall euro deal under discussion is complicated, weaving together the efforts to restructure Greek debt, increase the capital of Europe’s banks and expand the bailout fund so that it can ward off a financial panic in Italy — the euro zone’s third-largest economy — as well as in the relatively small economies of Greece and Portugal. Attention has focused on Italy because its government seems incapable of responding to the crisis, which has undermined the markets’ faith in Europe’s capacity to solve its problems.