European leaders achieved a breakthrough early today (27 October) to write off half of Greece's debt and seek foreign capital to double the eurozone's bailout fund to around €1 trillion. But crucial details on the fund's size were left for finance ministers to decide end of November.
Two weeks ago, British Prime Minister David Cameron called on his eurozone colleagues to make use of "the big bazooka" to end the euro crisis as a matter of urgency.
After an inconclusive summit on Sunday (see background), eurozone leaders agreed this morning what French President Nicolas Sarkozy described as "a global, an ambitious and a credible answer" to the eurozone crisis.
50% 'haircut' for Greek bondholders
First, eurozone leaders agreed on a new €100-billion package to save Greece from default, with the participation of the private sector and allowing for the ratio of Greek debt to GDP to fall to 120% by 2020. The current ratio is 165%.
This would take place under a "voluntary" agreement with private lenders, whereby they would give up 50% of their investments, amounting to €100 billion.
To achieve this, the eurozone countries agreed to mobilise €30 billion of public funds to finance guarantees for the private sector. (See: "EU cuts backroom deal on Greek debt write-down")
This appeared the most difficult decision at the summit, keeping Sarkozy and Merkel, together with IMF chief Christine Lagarde and Council President Herman Van Rompuy, in long separate talks with bankers on the sidelines of the summit.
Another "firewall" is the requirement for European banks to have core capital reserves of 9% after writing down their holdings of sovereign debt, by 30 June 2012. The total of amount needed for bank recapitalisation is estimated at €106 billion. Of this sum, a quarter is required for the recapitalisation of Spanish banks.
Boosting the EFSF
The second big decision was to increase the financial capacity of the European Financial Stability Fund (EFSF), from its initial €440 billion to €1 trillion. (Following the bailouts of Ireland and Portugal, its present level is estimated at some €250 billion).
EU leaders gave a mandate to European institutions to work more closely with the International Monetary Fund (IMF) to raise new funds.
Sarkozy made clear that this was needed to avoid the debt contagion spreading "to other eurozone countries and even further."
But crucial detail there remains to be decided, with EU finance ministers expected to come to an agreement by late November (see: 'EU chiefs to charm China on boosting bailout fund').
Eurozone becomes institution
In addition, eurozone leaders decided to meet at least twice a year, with all the countries that have adopted the currency committed to adopt "golden rule," enshrining deficit limits in their constitutions.
Eurozone leaders also decided to elect a eurozone president, a post for which Council President Herman Van Rompuy is already preparing.
Since successive crises struck Ireland, Portugal and Greece, the European Central Bank (ECB) has been buying sovereign debt on the secondary market in an attempt to keep interest rates at reasonable levels.
EU leaders are now considering an alternative mechanism, so far undefined, but the effort has been described by diplomats as extremely difficult and complex.
Doubts on bank recapitalisation persist
Doubts persist also with regards to the functioning of recapitalisation. Following the meeting of 27 EU heads of state that preceded the eurozone summit, Polish Finance Minister Jacek Rostowski said that banks in need of recapitalisation would first turn to private sources. If the banks are not capable of recapitalising, governments would then top up the capital by obtaining equity stakes in the banks.
“[Government funding] is not a gift to bank owners,” he said. In case of further difficulties, recapitalisation would take place from a guarantee mechanism among banks, in agreement with the European Banking Authority (EBA) and the European Commission, he said.
However, the statement concluding the wider summit of 27 heads of state, stipulates that in such circumstances, recapitalisation should be funded through loans from the EFSF in the case of eurozone countries.
Asked about the quantity involved for bank recapitalisation, Rostowski said that it would be “announced in due course” by the EBA.