European Leaders Reach “Broad Agreement” On Finances

October 27, 2011

European Union officials say they have reached a “broad agreement” on a plan to boost bank capital, but they failed to agree with private sector on how much of the Greek debt needs to be forgiven.

Under the plan hammered Wednesday in Brussels, European banks would have to raise close to $150 billion to recapitalize.

Eurozone leaders also plan to increase their bailout fund to $1.4 trillion, but details on how it will be done will not be finalized until next month.

But EU leaders failed to persuade private banks lending money to Greece to take a 60 percent loss on the debt.

Charles Dallara, director of the Institute of International Finance, which represents banks and private sector investors, said they are open to dialogue in search of a voluntary agreement to any deal.

French President Nicolas Sarkozy, German Chancellor Angela Merkel and IMF chief Christine Lagarde met with banking officials late Wednesday to discuss the issue.

The European heads of state are attempting to resolve a two-year-long debt crisis that in recent weeks has roiled international financial markets fearful of a Greek default on its obligations and the spread of the debt contagion to bigger European economies in Italy and Spain.

Ms. Merkel told German parliament earlier Wednesday that it is Europe's “most serious crisis since the end of World War Two.”

At her urging, the German lawmakers approved a sharp increase in the continent's bailout fund to assist debt-ridden countries. The parliament voted overwhelmingly to more than double the size of the fund to about $1.4 trillion. That gave Mrs. Merkel new clout as she headed to the late-day summit in the Belgian capital.

She called on banks holding Greek debt to forgive 50 percent of the amount the Athens government owes so that it can regain its economic footing over the coming decade.

But agreement on terms of the debt-relief plan has proved elusive, leaving some analysts to question whether the heads of state will be able to keep their pledge to complete the plan on Wednesday.

Greek Prime Minister George Papandreou called the impending decisions “a critical time,” requiring European leaders to “remain clear-headed and calm.”

The financial institutions agreed last July to write off 21 percent of the Greek debt they hold and have offered to raise that to 40 percent. But negotiations over terms of a deal appeared stalemated.

While the immediate focus has been on debt-ridden Greece, Mrs. Merkel and Mr. Sarkozy pressed Italian Prime Minister Silvio Berlusconi to move faster to adopt new economic reforms to stave off the need for an Italian bailout.