After an all night summit in Brussels Eurozone leaders have announced a three-pronged agreement designed to solve the region’s debt crisis.
Greek bondholders have been persuaded to take a 50% haircut in the face value of their bonds. Officials believe this will reduce Greek debt levels to 120% of GDP by the end of the decade. (It’s forecast to reach 170% next year.)
The “voluntary” losses by bondholders will not technically be a ‘Credit Event’ as defined by the ISDA (International Swaps and Derivatives Association) and therefore holders of Greek CDSs (credit default swaps) won’t receive a payout. This could send a shockwave through the CDS market since what’s the point of holding bond insurance if it doesn’t pay out in the event of a 50% loss?
The firepower of European Financial Stability Facility (EFSF), which is the main euro bailout fund, will be boosted from the current €440 billion to about €1 trillion (£880 billion $1.4 trillion). Two options have been agreed for achieving this, the first of which is to provide “risk insurance” to new bonds issued by struggling eurozone countries.
Leaders also struck a deal to recapitalise European banks to the tune of €106 billion (European Banking Authority estimate). The deadline for lenders to reach core capital reserves of 9 percent is 30 June 2012. Banks that fail to meet the target will face “constraints” on paying dividends and awarding bonuses.
The agreement also includes a new €130 billion bail-out of Greece by the European Union and the International Monetary Fund. A commitment from Italy to do more to reduce its debt, and a signal from leaders that the European Central Bank will maintain bond purchases in the secondary market.