The 50% Solution: Greek Rescue

European leaders emerge from Brussels meeting with an agreement to prevent Greece’s debt default

European leaders emerged from a 10-hour meeting in Brussels on Thursday with an agreement, finally, on how to prevent Greece from defaulting on its debt. The solution entailed a 50% write-down of Greek debt by banks, a boost in the euro zone’s rescue fund to $1.4 trillion and a substantial recapitalization of banks.

Banks were not happy with the arrangement and indeed were more dictated to than asked to comply, Bloomberg reported. AdvisorOne reported on Tuesday that banks were reluctant to accept such a large write-down, saying it would not be voluntary.

A statement issued by euro zone leaders around midnight was disputed by Charles Dallara, managing director of the Institute of International Finance (IIF), who said: “There is no agreement on any element of a deal.” However, Dallara was brought into the meeting, according to French President Nicolas Sarkozy, “not to negotiate, but to inform them on decisions taken by the 17 [European Union nations], and then they themselves went on to think and work on it.”

Euro zone leaders said that the write-down would be voluntary, although agreement was reached only after presentation of an offer banks could not refuse. “It was the fiercely delivered wish by Merkel, Sarkozy and Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of the total insolvency of Greece,” which “would have cost states a lot of money and would have ruined the banks,” Bloomberg quoted Luxembourg Prime Minister Jean-Claude Juncker as saying.

In the wee hours of the morning, Dallara finally issued a statement that said in part that the IIF agreed to “develop a concrete voluntary agreement on the firm basis of a nominal discount of 50% on notional Greek debt held by private investors.” It also said, according to a New York Times report, that Dallara welcomed the agreement, and called it “a comprehensive package of measures to stabilize Europe, to strengthen the European banking system and to support Greece’s reform effort.”

After the meeting ended, Merkel said, “We really made only one offer. The bank delegates took that back to their representatives. And this offer was specified in such a way—and we said that it’s our last word—that they took it up.”

While neither euro zone leaders nor European Central Bank (ECB) Jean-Claude Trichet mentioned the bond-buying program undertaken by the central bank, Trichet’s successor Mario Draghi said that the purchases would continue. He was quoted saying on Wednesday that the ECB remains “determined to avoid a poor functioning of monetary and financial markets.”

Banks will also be required to submit a plan by Christmas Day to raise enough money to recapitalize to a level of 9% of core capital reserves. They must meet that goal by June 30, 2012, after writing down sovereign debt holdings. If they fail to achieve those levels, they will be put under “constraints” regarding bonuses and dividends.

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