* Euro, stocks rally after euro summit deal
* Euro zone, banks agree to 50 pct private sector losses on
* Details of deal to be finalised by the end of the year -EU
* Euro zone says to scale up EFSF bailout fund to 1.0 trln
By Luke Baker and Julien Toyer
BRUSSELS, Oct 27Euro zone leaders struck a
last-minute deal on Thursday to contain the currency bloc's
two-year-old debt crisis but are now under pressure to finalise
the details of their plan to slash Greece's debt burden and
strengthen their rescue fund.
After a summit in Brussels, governments announced an
agreement under which private banks and insurers would accept 50
percent losses on their Greek debt holdings in the latest bid to
cut Athens' 360 billion euro debt load to sustainable levels.
Economists polled by Reuters on Thursday were split down the
middle over whether the writedown was big enough, with 24 of 47
saying it wasn't and the remainder saying it was.
Reached after more than eight hours of hard-nosed
negotiations between bankers, heads of state and the IMF, the
deal also foresees a recapitalisation of hard-hit European banks
and a leveraging of the bloc's rescue fund, the European
Financial Stability Facility (EFSF), to give it firepower of 1.0
trillion euros ($1.4 trillion).
U.S. stocks surged more than 2 percent in early trade and
European shares climbed 4 percent to a 12-week high on the deal.
They were led higher by banks which raced up over 9
percent, with BNP , Societe Generale and
Credit Agricole of France leading the way.
The euro shot above $1.41 to reach its top level against the
dollar in seven weeks.
But key aspects of the deal, including the mechanics of
boosting the EFSF and providing Greek debt relief, could take
weeks or even months to pin down, raising the risk of the plan
unravelling as the last one did.
"I see the main risk is that we are left waiting too long
again for the implementation of these agreements," European
Central Bank policymaker Ewald Nowotny said on Thursday. "Speed
is very important here," he told national broadcaster ORF.
Three months ago, euro zone leaders unveiled another
agreement that was meant to draw a line under the debt woes that
threaten to tear apart the 12-year old currency bloc.
In a matter of weeks they realised it was inadequate given
the depth of Greece's economic problems and the vulnerability of
The new deal aims to address these holes.
Under it, the private sector agreed to voluntarily accept a
nominal 50 percent cut in its bond investments to reduce
Greece's debt burden by 100 billion euros, cutting its debts to
120 percent of gross domestic product by 2020, from 160 percent
The euro zone will offer 30 billion euros in "credit
enhancements" or sweeteners to the private sector to get them on
board. The aim is to complete negotiations on the package by the
end of the year, so Greece has a full, second financial aid
programme in place before 2012.
The value of that package, EU sources said, would be 130
billion euros -- up from 109 billion euros in the July deal.
"The debt is absolutely sustainable now," Greek Prime
Minister George Papandreou said.
A top lawyer for the International Swaps and Derivatives
Association said that because banks had agreed to accept the
losses, the deal was unlikely to trigger a "credit event" under
which credit default swaps (CDS), or default insurance
contracts, would have to be paid out.
In a bid to convince markets that they can prevent larger
countries like Italy and Spain from being swept up by the
crisis, euro zone leaders also agreed to scale up the EFSF, the
440 billion euro bailout fund they created in May 2010 and have
already used to provide aid to Ireland, Portugal and Greece.
Around 250 billion euros remaining in the fund will be
leveraged 4-5 times, producing a headline figure of around 1.0
The EFSF will be leveraged in two ways, either by offering
insurance, or first-loss guarantees, to purchasers of euro zone
debt in the primary market, or via a special purpose investment
vehicle that will be set up in the coming weeks and which is
aimed at attracting investment from China and Brazil.
The methods could be combined, giving the EFSF greater
flexibility, the euro zone leaders said.
But EU finance ministers are not expected to agree on the
nitty-gritty elements of how the scaled up EFSF will work until
some time in November, with the exact date not fixed.
Another question mark is Italian Prime Minister Silvio
Berlusconi's commitment to implementing reforms seen as crucial
for restoring confidence in the bloc's third largest economy.
Dogged by scandals, Berlusconi has promised to raise the
retirement age to 67 by 2026 and attempt other reforms, but the
EU is reserving judgement after repeated backsliding from Rome
in recent months.
SARKOZY TALKS TO HU
French President Nicolas Sarkozy spoke by phone with Chinese
President Hu Jintao on Thursday.
Beijing is a big holder of European sovereign debt and an EU
source told Reuters the conversation would centre on Beijing's
possible participation in the bailout fund.
"China hopes all these measures will help stabilise the
European financial market and conquer the current difficulties
and promote the economic recovery and development," Hu said,
according to China's state television.
Japan and Canada welcomed the euro zone agreement. Earlier,
China's official Xinhua news agency had said the outcome of the
summit was "positive but filled with difficulties".
As with the July 21 agreement, the concern is that
Thursday's deal will only work if the fine print can be promptly
agreed with the private sector, represented by the Institute of
International Finance (IIF).
Charles Dallara, the managing director of the IIF, said
those he represented were committed to making the deal work.
"We believe (bank take-up) is likely to be very, very high,"
Dallara said on Thursday. "All parties recognised not only that
the future of Greece but also the future of Europe and the
future of the world economy was at stake."
Alongside the hit to the private sector, euro zone leaders
agreed the banking sector needs recapitalising to the tune of
around 106 billion euros.
"While the headlines look good, the devil is in the
details," said Damien Boey, equity strategist at Credit Suisse
in Sydney. "We don't actually know how they are planning to
increase the bail-out fund size from 440 billion euros to a
trillion. On top of that, there are some questions as to whether
one trillion euros in itself is enough."
There were corporate doubters, too. Oil giant Royal Dutch
Shell said it planned to curb its investments in the
European Union in future due to doubts about the bloc's chances
of recovering from the crisis.
"Europe's macroeconomic position can only recover and the
sovereign debt crisis can only be addressed through underlying
economic growth," Simon Henry, chief financial officer, told
reporters on a conference call on Thursday.
"We do not see the European Union creating the conditions
for that, in fact quite the opposite," he said.