New euro bailout deal for Greece brings cheer, markets rebound

The euro currency and stocks rallied on Thursday after European leaders struck a deal to provide debt relief for Greece but analysts warned the plan would fail to halt the Euro Zone's two-year-old debt crisis unless crucial details were resolved soon.

After a summit in Brussels, governments announced an agreement under which private banks and insurers would accept 50 per cent losses on their Greek debt holdings in the latest bid to reduce Athens' massive debt load to sustainable levels.

Reached after more than eight hours of hard-nosed negotiations between bankers, heads of state and the IMF, the deal also foresees a recapitalisation of hard-hit European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility (EFSF), to give it firepower of euro 1.0 trillion ($1.4 trillion).

European stocks surged to a 12-week high and the euro shot above $1.40 to reach its top level against the dollar in seven weeks following the deal, which had appeared at risk due to deep differences between Berlin and Paris.

Global stock markets soared, emboldened by EU leaders' predawn agreement to slash Greece's massive debts and use their bailout fund to contain any further turmoil.

Oil prices rose above $92 per barrel while the euro gained strongly following the European summit dedicated to fixing a debt mess in Greece before it spills into countries like Italy and Spain that Europe can't afford to rescue. Evidence that the US economy is picking up fed the rally later in the day.

European trading was buoyant from the outset. Britain's FTSE climbed 2.8 per cent to 5,707.13. Germany's DAX jumped five per cent to 6,324 and France's CAC-40 gained 5.9 per cent to 3,362.

Wall Street also surged at the open, with the Dow Jones industrial average rising 2.3 per cent to 12,138 and the broader Standard & Poor's index gaining 2.5 per cent to 1,272.

DEAL DETAILS Euro currency and stocks rally after euro summit deal Plans to leverage the bloc's rescue fund to give it firepower of euro 1 tn Private sector agrees to accept 50% cut in its bond investments to reduce Greece's debt burden by euro 100 bn Greece debts to come down to 120% of GDP by 2020, from 160% now Greece to get a second financial aid package by 2012 valued at euro 130 bn, up from euro 109 bn in July deal

The Greek market rallied on hopes the early morning deal would finally lift the spectre of government bankruptcy.

By the end of Thursday, shares on the Athens Stock Exchange had gained 4.8 per cent to 811, with banking stocks up 12 per cent - after suffering heavy losses earlier this week.

However, economists noted that key aspects of the deal, including the mechanics of boosting the EFSF and providing Greek debt relief, would take weeks to pin down, meaning the plan could still unravel over the details.

"There is plenty of room to doubt whether each of the key aspects of the package will deliver within its own space," said Malcolm Barr, an economist at JP Morgan. The hope of EU policy makers is that the whole will be perceived as more than the sum of its rather questionable parts.

Three months ago, Euro Zone leaders unveiled another agreement that was meant to draw a line under the debt woes that threaten to tear apart the 12-year old currency bloc. But they realised within weeks that it was inadequate, given the depth of Greece's economic problems and the vulnerability of their banks.

The new deal aims to address these holes.

Under it, the private sector agreed to voluntarily accept a nominal 50 per cent cut in its bond investments to reduce Greece's debt burden by euro 100 billion, cutting its debts to 120 per cent of gross domestic product (GDP) by 2020, from 160 per cent now.

With inputs from Agencies