The deal, which has been months in the making, came unexpectedly at 4 a.m. after marathon talks between the Institute of International Finance (IIF) and EU officials tucked away in a separate room from the leaders' summit in Brussels.
Heads of state eagerly awaited word from the EU official Vittorio Grilli who was talking to the representative from the IIF Charles Dallara. At 5 a.m., negotiations appeared to have broken down between the two sides and expectations on a deal were very low.
At the last minute, banks seemingly caved in to German demands for a 50% cut on their holdings of Greek sovereign debt to allow leaders to move forward on a second bailout for the beleaguered country. Leading European banks ING and BNP Paribas had said previously they would accept no more than a 40% cut.
“Just days ago a deal was less than expected,” German Chancellor Angela Merkel announced at 4 a.m. press briefing.
“We only have one offer to make and that was accepted,” Merkel said.
The 50% cut is intended to help Greece arrive at a 120% debt to GDP ratio by 2020, according to a summit statement following the eurozone leaders’ agreement.
"We invite Greece, private investors and all parties concerned to develop a voluntary bond exchange with a nominal discount of 50% on notional Greek debt held by private investors," the statement said.
But banks did not capitulate too easily. The paper also confirms that they will be receiving a €30-billion sweetener in exchange for the deal which will partly come from the EFSF and partly from money made by the Greek government on attempts to privatise state assets.
In addition, leaders agreed to an extra €100 billion in funding to help Greece surmount its debts. “The official sector stands ready to provide additional programme financing of up to €100 billion until 2014, including the required recapitalisation of Greek banks,” the statement says.
Greek banks are estimated to have the biggest capital holes on their balance sheets. Figures from Morgan Stanley estimate that Greek banks would require more than €80 billion in handouts, while Spain, Italy, France and Germany require up to €30 billion between them.