Reuters

Stocks and the euro rallied yesterday after EU leaders made progress on the debt crisis. Photo: Reuters

James G Neuger and Stephanie Bodoni Brussels

European leaders cajoled bondholders into accepting 50 percent write-downs on Greek debt and boosted their rescue fund’s capacity to e1 trillion (R11 trillion) in a crisis-fighting package intended to shield the euro zone.

The euro and stocks climbed while bond spreads narrowed after leaders emerged early yesterday from a 10-hour summit in Brussels armed with a plan they said pointed the way out of the quagmire, albeit with some details still to be ironed out.

“Overall the outcome is better than we anticipated one week ago,” Nomura International global head of inflation strategy Laurent Bilke said.

Last-ditch talks with bank representatives led to the debt-relief accord, in an effort to quarantine Greece and stop speculation against Italy and France from ravaging the bloc.

“The world’s attention was on these talks,” German Chancellor Angela Merkel said in Brussels at 4.15am. “We Europeans showed tonight that we reached the right conclusions.”

Measures include recapitalisation of European banks, a potentially bigger role for the International Monetary Fund (IMF), a commitment from Italy to do more to cut its debt and a signal from leaders that the European Central Bank (ECB) will continue bond purchases.

The euro advanced to a seven-week high of $1.4007 by 11.48am in Brussels while the Stoxx Europe 600 index surged by 2.6 percent.

“It’s long on words, short on detail,” said Peter Dixon, an economist at Commerzbank in London. “The solution that’s been put in place now gives us enough ammunition to stave off any immediate problems but we may well run into other problems down the track.”

The leaders summoned the banks’ representative, Institute of International Finance managing director Charles Dallara, into the summit to break the deadlock over how to cut Greece’s debt to 120 percent of gross domestic product by 2020 from a forecast of about 170 percent next year.

French President Nicolas Sarkozy said the bankers were escorted in “not to negotiate, but to inform them on decisions taken by the 17 and then they themselves went on to think and work on it”.

Luxembourg Prime Minister Jean-Claude Juncker said the banks’ resistance was broken by a threat “to move toward a scenario of total insolvency of Greece, which would have cost states a lot of money and which would have ruined the banks”.

The resulting “voluntary” losses by bondholders were the key plank in a second bailout for Greece, which was awarded e110 billion in May 2010. The new programme includes e130bn of official aid, up from e109bn envisioned in July.

The IMF, meanwhile, said it was ready to disburse its e2.2bn share of the next instalment of Greece’s original bailout. The release of the euro zone’s e5.8bn share was approved last week.

Greek, Spanish, Italian and French bonds rallied yesterday, narrowing the spread with German bonds.

ECB president Jean-Claude Trichet, who has warned of the spillover effects of bond write-downs on the banking system, did not take part in the confrontation with bankers on the debt relief. He later praised the leaders’ determination to get ahead of the crisis.

The measures agreed “have to be fully implemented, as rapidly and effectively as possible”, Trichet said afterwards.

Leaders backed two ways of leveraging up the e440bn rescue fund, which was designed last year to shield smaller countries such as Greece, Ireland and Portugal, and lacks the heft to protect Italy from default.

Under plans to be spelled out next month, the fund will be used to insure bond sales and to create a special investment vehicle that would court outside money.

Sarkozy was mandated to call Chinese President Hu Jintao today with the goal of tapping into the world’s largest foreign exchange reserves to bolster the rescue.

Europe also struck a bank recapitalisation accord, setting a June 30 deadline for lenders to reach core capital reserves of 9 percent after writing down their sovereign debt holdings. Banks below that level would face “constraints” on paying dividends and awarding bonuses, a statement said.

The European Banking Authority put banks’ capital needs at e106bn. – Bloomberg