EU armtwists banks for 50% haircut on Athens’ bonds, US equities see biggest monthly rally since 1987.
Following marathon talks that stretched into early this morning, Eurpean Union leaders were able to extract a haircut from their bankers.
The headline news emerging from the EU summit here was a deal with Greek debt holders that would see private investors take a 50 per cent loss on the face value of their bonds. EU president Herman Van Rompuy said this would reduce Athens’ debt level to 120 per cent of gross domestic product by the end of the decade, by slashing euro100 billion from the money it owes. He revealed the euro zone and the International Monetary Fund would give the country another euro130 billion over the next three years, in addition to the euro110 billion already handed over in bailout money.
Banks had agreed to a 21 per cent haircut in July and had been resisting an increase on this figure. Direct intervention by German chancellor Angela Merkel and French president Nicolas Sarkozy broke the deadlock. Although details of the deal as outlined by European leaders and the Institute of International Finance (the body representing the banks) remained vague, officials said euro30 billion of the government’s second bailout package would go to so-called ‘sweeteners’ for a future bond swap, to be completed by January. Stocks surged, extending the biggest monthly rally in US equities since 1987, and the euro strengthened as European leaders agreed to expand the bailout fund to stem the region’s debt crisis. The S&P 500 Index rallied 2.9 per cent to 1,278.09 at 12:50 pm, sending its October gain to 13 per cent, while the Dow Jones traded above the 12,000 level.
Benchmark gauges in France, Italy and Germany rose more than 5 per cent as German and emerging-market stocks extended gains from this year’s lows to more than 20 per cent.
The US economy grew at a 2.5 per cent annual rate in the third quarter, according to figures from the Commerce Department. The 10-year US Treasury yield climbed as high as 2.32 per cent, a two-month high, while the seven-year yield increased eight basis points to 1.74 per cent before the US sells $29 billion of the securities, the last of three auctions this week totaling $99 billion.
The euro traded at $1.4201 and climbed as much as 2.3 per cent to $1.4220. The shared currency strengthened versus nine of 16 major peers, rallying 1.6 per cent versus the yen. As expected, the leaders also announced plans to require banks to raise around ¤100 billion in capital to protect themselves against potential losses on loans to Greece and other afflicted countries such as Portugal. The extra money may have to come from national coffers, if banks are unable to raise it through private investors by a deadline of next July. Only as a last resort would they be able to turn to the EFSF (European Financial Stability Facility), the euro zone’s bailout fund.
The EFSF was the subject of the other major outcome of the summit, with leaders struggling to agree on ways to increase the fund’s firepower by enough to prevent fiscal contagion from spreading to large economies such as Italy and Spain. Two ways of leveraging the fund were announced, although details on implementation were thin.
Many details of the package remain vague and markets will have to wait till at least a meeting of finance chiefs in November before the blanks are filled, if not later.
