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Wednesday, October 26, 2011

Europe Uncertainty Plummets - Deal is Done

European Union leaders unveiled a deal early Thursday on debt crisis measures that includes a 50% loss on Greek bonds.

The agreement came at the end of a series of talks to finalize 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 will likely resolve three related problems: the debt crisis in Greece, instability in the banking sector and an under-capitalized bailout fund.

Under the new plan, Greek bondholders voluntarily agreed to write down the value of Greek bonds by 50%, which translates into €100 billion and will reduce the nation's debt load to 120% of economic output from 150%.

The agreement also calls for the creation of a new financing program with the International Monetary Fund worth up to €100 billion.

Stronger bailout fund: The leaders agreed on two ways to increase the firepower of the EU bailout fund, known as the European Financial Stability Facility. The methods will each leverage the fund by four or five fold, the statement said, boosting its resources to about €1 trillion.
The fund will be used to partially ensure new issues of government bonds. In addition, it will be supplemented by the creation of one or more special investment vehicles, which will be open to private sector players such as sovereign wealth funds.

The EU heads of state also agreed to raise capital requirements for banks vulnerable to losses on euro-area government bonds.

Banks would be required to sharply increase core capital levels to 9% to create a buffer against potential losses.


  1. Looks like the plan was not enough. It seems like it only takes a sneeze out of Greece to send the markets plunging. Don't you think the real concern is trillions of dollars of leveraged loans and credit default swaps that will take down the whole Eurozone once Greece defaults?

  2. All I can say is that it was a very stupid move on the part of Papandreou. Not sure what he was thinking, but reflects a marked lack of leadership on his part.

    It would be like Ben Bernanke asking for a popular vote from US citizens every time the Fed board wants to make a monetary policy decision. Are you kidding me?!

    Yes I think there are real concerns -- will a popular political vote solve it? Not a chance.

    Very poor move on the prime minister's part.


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