Euro Zone Accepted a New Plan to Reduce Greece’s Debts

European leaders have proclaimed a new crucial plan to reduce Greece’s debts and provide it with more loans so that the country can eventually get out of its debt burden.

Angela Merkel, the German Chancellor, suggested increasing the eurozone’s bailout fund to €1trillion and a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros.Photo:Moritz Hager/Flickr

After a marathon summit of over ten hours talks ended early Tuesday morning EU President, Herman Van Rompuy, announced that the deal will decrease Greece’s debt to 120 percent of its GDP in 2020. Under current conditions, it would have grown to 180 percent.

“These are exceptional measures for exceptional times. Europe must never find itself in this situation again,” Jose Manuel Barroso, European Commission President, claimed after the summit.

“The world’s attention was on these talks today,” Merkel said. “We Europeans showed tonight that we reached the right conclusions.”

The decision was accepted after long negotiations which involved bankers, heads of state, central bankers and the International Monetary Fund.

“These are exceptional measures for exceptional times. Europe must never find itself in this situation again,” Manuel Barroso said.

At the same time, the euro zone will offer “credit enhancements” to the private sector totaling 30 billion euros. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid program in place before 2012.

The fund has already been used to help Ireland, Portugal and Greece, leaving around 290 billion euros available. Around 250 billion of that will be leveraged 4-5 times, producing a headline figure of around 1.0 trillion euros, which will be deployed in a variety of ways.

1.0 trillion euros, which will be deployed in a variety of ways.

Nicolas Sarkozy, the President of France, told reporters after the summit finshed, “We have reached an agreement which I believe lets us give a credible and ambitious and overall response to the Greek crisis. 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.”

The EFSF will be used in two ways, either by offering insurance, or first-loss guarantees, to purchasers of euro zone debt in the primary market, or via a special purpose investment vehicle that will be set up in the coming weeks and which is aimed at attracting investment from China and Brazil.

Combining of these two vehicles will add the EFSF greater flexibility, said the euro zone leaders.

“The leverage could be up to one trillion (euros) under certain assumptions about market conditions and investors’ responsiveness in view of economic policies,” announced Herman Van Rompuy, the president of the European Council.

“There is nothing secret in all this, it is not easy to explain but we are going to more with our available money, it is not that spectacular. Banks have been doing this for centuries, it has been their core business, with certain limits.”

The managing director of the Re-Define economic think tank, Sony Kapoor, is sure that eurozone leaders had failed to come up with a convincing deal.

“EU leaders needed to pull a rabbit out of the hat. They have failed to do so,” he said.  “This is no ‘comprehensive deal’, the numbers are too small, the timelines too long and details too thin on the ground. An invitation to agree to a haircut is not the same as a haircut.” [Via The Telegraph and Reuters]

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