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Details of the European Debt Crisis Deal

It was guessed that the Euro member countries would have difficulty in agreeing and that was the case. The negotiations to save Greece lasted ten hours. That was not the states but the creditor banks to Greece were nearly causing the deal to collapse, but finally, the banks holding the Greek debt accepted a 50% loss. The banks negotiated fiercely with the dual leaders, Merkel-Sarkozy. Also, according to the deal, The Eurozone rescue fund will be boosted and banks will have to raise more capital.

The details of the agreement:

Banks’ aid to Greece:
Banks and other funds that hold Greek debt agreed to voluntarily relinquish 50% of their claims on the Greek debt by 2020: in concrete terms, from January 2012, they will exchange their Greek bonds against the others whose value will be halved, which means a deletion of 100 billion Euros of Greek debt, currently at 350 billion Euros. The European stability fund will provide 30 billion Euros in guarantees to support bond swap.

The previous plan of 109 billion Euros aid (EU and International Monetary Fund) for Greece decided on July 21 is replaced by another one which amounts to 100 billion Euros, until 2014.Greece and the reforms required in the country will be closely monitored .Athens will have to find 15 billion to reduce its debt through privatization

Recapitalization of banks:

Banks will have to reach core capital reserves of 9 % by 30 June 2012.To achieve this; Banks will primarily use private sources. Banks should be subject to constraints on bonuses and dividends.

The European banking authority (EBA) stated that 106 billion Euro needed for recapitalization of the banks and that concerns 70 establishments. The most concerned are the Greek banks (30 billion) before the Spanish banks (26.16 billion) and Italian banks (14.77 billion).

Strengthening European rescue fund (The European Financial Stability Facility (EFSF) :
The EFSF has currently 440 billion loan capacity and that will reach about 1000 billion. Two mechanisms are created to complement each other. The first will be to ensure some of the potential losses of private investors when they buy government bonds on the primary market. The other one is to create one or more special funds to attract external private or public investors, like from emerging markets. The text also mentions a closer cooperation with the IMF.

Building fiscal discipline:
“Golden rule” balanced budget will be generalized. The EU commits to implement the following additional measures at the national level:
a. adoption by each euro area Member State of rules on balanced budget in structural terms translating the Stability and Growth Pact into national legislation, preferably at constitutional level or equivalent, by the end of 2012.
b. reinforcement of national fiscal frameworks beyond the Directive on requirements for budgetary frameworks of the Member States. In particular, national budgets should be based on independent growth forecasts;
c. invitation to national parliaments to take into account recommendations adopted at the EU level on the conduct of economic and budgetary policies;
d. consultation of the Commission and other euro area Member States before the adoption of any major fiscal or economic policy reform plans with potential spillover effects, so as to give the possibility for an assessment of possible impact for the euro area as a whole.

Strengthening economic governance of the euro area:
European leaders will meet regularly – at least twice a year- at our level, in Euro Summits, to provide strategic orientations on the economic and fiscal policies in the euro area. This will allow to better take into account the euro area dimension in our domestic policies.

Role of the ECB:
The eurozone governments may have to count on the role of the European central bank to support fragile states such as Italy and Spain. Its future president, Mario Draghi, has promised to continue to do so if necessary.