BRUSSELS, Belgium - European leaders agreed this morning on a crucial plan to reduce Greece's debt and provide it with more rescue loans so that the faltering country can eventually dig out from under its debt burden.
After a marathon summit, EU President Herman Van Rompuy said that the deal will reduce Greece's debt to 120 percent of its GDP in 2020. Under current conditions, it would have grown to 180 percent.
That will require banks to take on 50 percent losses on their Greek bond holdings - a hard-fought deal that negotiators will now have to sell to individual bondholders.
Van Rompuy also said the eurozone and International Monetary Fund - which have both been propping the country up with loans since May 2010 - will give the country an additional $140 billion. That's slightly less than the amount agreed upon in July, presumably because the banks will now pick up more of the slack.
"These are exceptional measures for exceptional times. Europe must never find itself in this situation again," European Commission President Jose Manuel Barroso said after the meetings.
The question of how to reduce Greece's debt load had proved the sticking point in European leaders' efforts to come up with a grand plan to solve its debt crisis.
But it was just one of three prongs necessary to restore confidence in Europe's ability to pay its debts and prevent the 2-year-old crisis from pushing the continent and much of the developed world back into recession.
The first details of such a plan emerged hours earlier, when European Union leaders announced they would force the continent's biggest banks to raise $148 billion by June - partially to ensure they could weather the expected losses on Greek debt.
Van Rompuy also announced that the eurozone would boost the firepower of their bailout fund to about $1.4 trillion to protect larger economies, such as Italy's and Spain's, from the market turmoil that has pushed three countries to need bailouts.
"We have reached an agreement which I believe lets us give a credible and ambitious and overall response to the Greek crisis," French President Nicolas Sarkozy told reporters as the meeting broke this morning. "Because of the complexity of the issues at stake, it took us a full night. But the results will be a source of huge relief worldwide."
Efforts to increase the clout of the bailout fund got a boost earlier in the day when German Chancellor Angela Merkel won a strong endorsement from German lawmakers for her plan to reinforce the fund.
Italian Prime Minister Silvio Berlusconi, meantime, came to Brussels with plans to change his country's pension system and take other steps to balance the budget. Other European leaders had pressed him to accelerate those steps to help build confidence that his nation can manage its large levels of public debt.
Because the plan to shore up the banks applies to European economies both inside and outside the euro area, the initiative was the subject of deliberations by the full EU.
Along with increasing bank capital, the plan calls for a new effort by governments to ensure that banks have the funds they need to operate.
European banks rely heavily on short-term loans, and the vulnerability of that funding played a role in the recent collapse of the French-Belgian Dexia bank.
Concerns about the European economy have caused many investors, including U.S.-based money-market funds, to pull out of European banks. This development has raised banks' operating costs and generated fear that Dexia would be just the first in a series of casualties.
The new plan asks the European Central Bank, the European Investment Bank and other agencies to "urgently explore" a guarantee system so that banks could wean themselves from short-term loans, which often must be renewed weekly or even daily.
Under the plan, banks would have to set aside capital equal to 9 percent of their assets. That represents a significant increase from the 5 percent level used as a standard by the European Banking Authority, when it recently analyzed whether the region's financial firms could weather a new economic downturn.
One concern about increasing relative capital levels is that banks could reach the 9 percent threshold by decreasing their total assets, in other words reducing how much money they loan to businesses, consumers and governments. This pullback could stymie economic growth at a time when it is already slowing in much of Europe.
To head off this prospect, the bank capital plan calls for heightened oversight by regulators to ensure that banks don't achieve the new targets by selling off assets or restricting new loans.
by Associated Press Oct. 27, 2011 12:00 AM
Greece to get 100 bil euros in more rescue loans
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