Europe has a plan

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It looks like we have a deal after all. After this mornings report that there was no deal at all on holders of Greek debt we suddenly have an announcement that from officials in Brussels that they have reached a deal with banks on a 50 per cent write-off. This has paved the way for the finalisation of the EFSF leveraging mechanism and we already know about the bank recapitalisation plan.

EU President Herman Van Rompuy has said that the write-offs will reduce Greece’s debt to 120 per cent of its GDP by 2020 and he also stated that the EU and the IMF will be handing over another 100 billion euro.

French President Nicolas Sarkozy has just stated that he estimates the euro region’s bailout fund will be worth between €800 billion to €1.3 trillion by a leverage of 4 to 5 times and will be used to guarantee the bonds issued by countries like Spain and Italy.

There are still a huge number of unknowns. I wonder how France it going to keeps is AAA rating under this plan. I wonder exactly how banks are going to scrape together 9 percent capital after 50% write-downs. I also wonder how a 50% write-down of debt can be considered “voluntary” given the huge amount of money involved. I am also interested to know exactly what sort of leverage the EU could possibly have now over Portugal, Spain, Ireland and Italy not to demand exactly the same treatment as Greece. I would also note that the macro-economic issues within the Euro area haven’t been address at all under these arrangements.

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But for today, at least, the Eurocrats seemed to have actually achieved something they set out to do which, given the political hurdles, is no small achievement.

Now we wait to get the market’s reaction.

Update: CalculatedRisk has some additional statements from various sources.