European leaders agree on plans to shore up banks in effort to contain debt crisis

View Photo Gallery —  European leaders are at a crossroads: They must pull closer together or risk the euro currency project falling apart.

By Howard Schneider and Michael Birnbaum, Published: October 26

ATHENS — European leaders moved early Thursday to stem the debt crisis gripping the continent by agreeing to a plan that imposes steep losses on investors holding troubled Greek bonds and boosts the firepower of the region’s bailout fund to at least a trillion dollars.

After marathon negotiations that continued well past midnight, European leaders said banks and other major investors in Greek bonds agreed to take losses of up to 50 percent. This concession was meant to help prevent the Greek government from defaulting on bills it cannot pay and avoid an even costlier shock to the European financial system.


The losses are much larger than private investors accepted under a deal this summer. Since then, Greece’s economy has steadily eroded, making it even harder for the government to repay its bonds.

The question of how to structure a new refinancing plan for Greece and divide the costs of rescuing it has been at the center of negotiations. Other elements of the plan were dependent on European officials reaching an agreement with negotiators for major banks, which had been balking at taking bigger losses.

Under the deal, the bailout fund, known as the new European Financial Stability Facility, would help cash-strapped countries such as Italy and Spain borrow at least a trillion dollars by providing a kind of insurance that would make their bonds more attractive to investors.

The breakthrough at a summit meeting in Brussels came hours after leaders announced they had agreed on measures to shore up the region’s banking system. The 27-member European Union said banks would be asked to raise perhaps $150 billion in new capital as a buffer against possible losses on their holdings of European government bonds that have declined in value.

Once the bank capital plan was announced late Wednesday, the smaller group of 17 European nations that share the euro continued talks over the remaining issues that threatened to scotch an overall deal. Those included how to put Greece’s troubled government finances back on a stable footing and how to best use the limited resources of the bailout fund set up by the euro-zone countries.

Failure to reach an agreement on a new Greek bailout would have seriously set back hopes that Europe’s leaders were finally poised to produce an ambitious plan for addressing the continent’s crisis. U.S. officials, among others, had been pressing them to take strong steps before the crisis spread further.

Speaking early Thursday, European Commission President Jose Manuel Barroso said the set of interrelated measures proves that “Europe will do what it takes to safeguard financial stability.”

The package, he said, makes good on promises top European leaders made to officials from the United States and elsewhere to address Europe’s financial problems more forcefully before a meeting of the Group of 20 top economic powers early next month in France.

Posted in: World business