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European leaders finally thrashed out a comprehensive crisis response Wednesday night which culminated in a communiqué released yesterday morning in Brussels. Italy has 'committed' to both fiscal consolidation and meaningful structural reform to achieve a balanced budget by 2013 and to introduce a balanced budget rule by mid-2012. This will include wildly unpopular legislation to increase the retirement age to 67 from 65 by 2026. Greece will have a full-time on-the-ground monitoring team from the EU/IMF/ECB troika stationed in Athens "to advise and offer assistance" and "ensure the timely and full implementation of the reforms". On Greek-debt haircuts, private bondholders have apparently agreed to a "voluntary" bond exchange equivalent to 50% to enable a reduction in government debt/GDP of 120% by 2020. Eurozone members have pledged an extra EUR 30bn.For the EFSF, there will be two complementary approaches, the provision of credit enhancement for new issuances by member states and also additional funding from private and public institutions and investors, probably into some form of SPV. According to Sarkozy, the uncommitted portion of the EFSF (around EUR 250bn) could be leveraged four or five times (offering insurance of either 20% or 25%) to boost the firepower of the EFSF to over EUR 1trln excluding any funds from 'rich donors'. Regarding recapitalisation, banks' capital ratio is be raised to 9% by mid-2012 meaning that up to 70 banks may need collectively to raise EUR 106bn with governments to supply guarantees to prevent significant deleveraging. | |||
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