October 27, 2011
Meeting late into the night, euro-zone leaders agreed to reduce Greece's vast debt burden by half. In addition, the euro backstop fund will be boosted to over a trillion euros. Europe hopes the measures will finally put an end to the spread of the debt crisis.
It was later than they planned. But finally, just before 4 a.m. in Brussels, the 17 heads of state and government in the euro zone announced that they had reached an agreement on the way forward in the ongoing debt crisis. Greek debt, French President Nicolas Sarkozy announced, was to be slashed by 50 percent.
"The world was watching us today and we showed that we reached the correct conclusions," said German Chancellor Angela Merkel after the summit had finally ended. She said she was "very pleased" with the result.
In addition to the significant debt haircut for Athens, euro-zone leaders also agreed to require European banks to increase their core capital ratios to 9 percent, a measure aimed at preventing the sovereign debt crisis from becoming a second banking and financial crisis.
The euro zone also agreed to boost the impact of the euro backstop fund, the European Financial Stability Facility (EFSF), to around €1 trillion ($1.4 trillion). While not providing specifics, it will likely be a combination of two options which had been widely discussed in the run up to the meeting. The first is a first-loss insurance model, where the first 20 percent of any investments in euro-zone sovereign bonds would be guaranteed be the EFSF. The second envisions the EFSF backing an investment fund to attract outside money from pension funds and national investment pots, such as the China Investment Corporation. The final details are to be worked out at a euro-zone meeting in November.
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