BRUSSELS (MNI)- Eurozone leaders unveiled a sweeping rescue package
early Thursday that included cutting Greece’s private-sector debt by
half and boosting the size of Europe’s bailout fund to E1 trillion.

After an all-night bargaining session, Eurozone officials and major
banks agreed to reduce the value of the Greek bonds they hold by 50%.
The move will reduce Greek debt to 120% of GDP by 2020, a level that
official lenders believe is sustainable.

“We have given an extremely strong sign to pacify the markets,”
French President Nicolas Sarkozy told a press briefing, adding that the
deal represented a “durable solution” to the Greek crisis.

Leaders were under intense pressure to cut a deal before markets
opened on Thursday, after the summit was billed by some finance
officials as the last chance to save the euro.

“I am very aware that the world was closely monitoring these
negotiations,” said German Chancellor Angela Merkel. “Europe has shown
that it is taking the right steps,” she said.

In addition to the cut in Greek debt and the enlarged bailout fund,
the three-pronged rescue strategy included a bank recapitalization that
will force 70 European banks to raise E106 billion in fresh capital by
June 2013. The plan also calls for national governments to provide
guarantees that will ease funding strains for banks.

The deal, while containing all the elements leaders had promised,
was not as robust as markets initially expected. Many economist had
estimated that the bill for recaptalizing Europe’s banks would top E200
billion and that a leveraged EFSF could total E2 trillion or more.

Sarkozy said the uncommitted portion of the E440 billion bailout
fund, the European Financial Stability Facility, will be leveraged four
to five times. As expected, the leverage will come from the fund
providing credit enhancements to new debt issued by member states and by
attracting funds from private and public investors for special purpose
vehicles.

The two options “can be used simultaneously, so as to increase the
robustness of the financing strategy,” said Herman Van Rompuy, who
chaired the meetings of EU leaders.

The enhanced EFSF is expected to be functioning by the end of
November and relieve the European Central Bank of its role in buying
distressed peripheral country debt. The fund is also expected to make
loans to banks seeking to recapitalize and to provide precautionary
lines of credit to member states.

Sarkozy said he planned to speak by telephone to Chinese President
Hu Jintao on Thursday about the possibility of that nation investing in
the bailout fund. The fund’s chief executive, Klaus Regling, is due to
visit China Friday.

Elsewhere in the rescue plan, officials announced new measures to
strengthen economic policy coordination and surveillance within the euro
area, including more regular meetings and clearer of administrative
structures.

Van Rompuy emphasized the increasingly important role that peer
pressure would play in enforcing economic discipline.

“Compared to eight or ten years ago, the pressure which leaders put
on each other has become much more effective, as the events of the last
days show,” he said, referring to last weekend’s summit when France and
Germany pressured Italy to demonstrate greater commitment to reform.

“Today no government can afford to underestimate the possible
impact of public debts or housing bubbles in another Eurozone country
on its own economy; they would be punished by the voters, and by the
markets. Peer pressure has become more effective, because the money of
their taxpayers is at stake,” he said.

By Peter Koh, Johanna Treeck, Jack Duffy and Angelika Papamiltiadou

Brussels bureau: +32495228374; pkoh@marketnews.com

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