The much anticipated EU Summit last night in Brussels ended with success after an eight-hour negotiation session between the leaders of the 27-member European Union and bankers that finally resulted in an agreement on Greek bond haircuts.
Under the deal, private bondholders will accept a 50 percent write-down on their holdings of Greek debt. This will result in reducing Greece’s debt by 100 billion euros. The remainder of the debt is to be re-financed at a lower interest rate. Consequently the remaining debt will be equal to 120 percent of GDP, lower than the current 160 percent.
Plans were also made to scale up the 440 billion euro European Financial Stability Facility rescue fund through leveraging, to up to 1 trillion euros.
European policy makers hope that will be enough to contain debt from swallowing Italy and Spain. The fund has already been used to provide help to Ireland, Portugal and Greece.
EU finance ministers are not expected to agree on the details of how the scaled up EFSF will work until some time in November.
Also at the Summit, plans were made to increase PSI (private sector involvement) in Greece.
Finally, agreeing on recapitalisation of the European banking sector by around 106 billion euros, will prevent the sovereign debt crisis from spreading to the banking sector.
The euro gained strength after the successful conclusion of the Summit.