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A euro-saving deal

European leaders clinched a deal Thursday they hope will mark a turning point in their two-year debt crisis, agreeing after a night of tense negotiations to have banks take bigger losses on Greece's debts and to boost the region's weapons against the market turmoil.

"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. Sarkozy later called his Chinese counterpart Hu Jintao and pledged to cooperate to revive global growth, but there was no word on whether Beijing might contribute to Europe's bailout fund. The strategy unveiled after 10 hours of negotiations focused on three key points: a significant reduction in Greece's debts, a shoring up of the continent's banks, partially so they could sustain deeper losses on Greek bonds, and a reinforcement of a European bailout fund so it can serve as a $1.39 trillion firewall to prevent larger economies like Italy and Spain from being dragged into the crisis.

Associated Press, New York Times

"We have avoided a mortal national danger.''

Greece's prime minister voiced deep relief Thursday at the debt relief and bailout deal, which he said has bought the country time to make a new start and will spare future generations of Greeks from a crippling burden. In an address to the nation, a haggard looking George Papandreou told austerity-weary Greeks that the $182 billion package ended months of uncertainty over the country's future. "The agreement allows us to make the necessary reforms without the burden of debt hanging around our necks," he said, referring to Greece's demanding — and unpopular — program of austerity measures.

Merkel and Sarkozy call the bluff of European banks.

In the end, it was Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France against the European banking establishment — and the bankers blinked. It was approaching 2 a.m. Thursday, not long before the Asian markets would open, and the two leaders were trying to nail down the last component of a complex deal to save the euro: forcing the banks to pay a greater share of Greece's effective default. Merkel called the bankers' bluff, said officials present at the discussions in Brussels. Accept the 50 percent write-down, she told the bankers, or bear the consequences of default.

Next issue for Europe: getting Italy's financial house in order.

Prime Minister Silvio Berlusconi has promised fellow European leaders a quick series of wide-ranging changes to get Italy's economy back on track, but it is not clear that he has the political clout to enact them. Berlusconi, 75, has watched his support slide precipitously in recent months. Italy should be capable of shouldering its overall debt, which stands at 120 percent of gross domestic product. But that assumes that markets maintain faith in its ability to handle its problems and do not send interest rates on its debts skyrocketing, as they did with Greece, Portugal and Ireland.

A euro-saving deal 10/27/11 [Last modified: Friday, October 28, 2011 12:15am]

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