Banks Bow to ‘Last Word’ From Merkel, Sarkozy on 50% Greek Debt Writedown

The world’s biggest banks bowed to what German Chancellor Angela Merkel called the “last word,” agreeing to write down their Greek government debt by half in the pivotal piece of the euro area’s bid to stem the financial crisis.

The Institute of International Finance, which represents financial companies, agreed to “develop a concrete voluntary agreement on the firm basis of a nominal discount of 50 percent on notional Greek debt held by private investors,” Managing Director Charles Dallara said in a statement e-mailed at 4:26 a.m. in Brussels.

Euro-area leaders who called Dallara into a meeting at about midnight, forcing a break in their 10-hour summit, said that while the bond transaction will be voluntary, the decision resulted from an offer he couldn’t refuse.

“It was the fiercely delivered wish by Merkel, Sarkozy, Juncker, that if a voluntary agreement with the banks was not possible, we wouldn’t resist one second to move toward a scenario of the total insolvency of Greece,” Luxembourg Prime Minister Jean-Claude Juncker told reporters. That “would have cost states a lot of money and would have ruined the banks.”

The euro rose and stocks advanced, with the currency gaining 0.7 percent to $1.4007 at 9:45 a.m. in Brussels. The Stoxx Europe 600 Index surged 2.5 percent and Standard & Poor’s 500 Index futures added 1.6 percent. The Stoxx 600 Banks Index jumped 5.3 percent, the biggest gain since Sept. 27.

Photographer: Hannelore Foerster/Bloomberg

"We really made only one offer," Angela Merkel told reporters after the summit. "The bank delegates took that back to their representatives. And this offer was specified in such a way -- and we said that it’s our last word -- that they took it up." Close

"We really made only one offer," Angela Merkel told reporters after the summit. "The... Read More

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Photographer: Hannelore Foerster/Bloomberg

"We really made only one offer," Angela Merkel told reporters after the summit. "The bank delegates took that back to their representatives. And this offer was specified in such a way -- and we said that it’s our last word -- that they took it up."

Deal Linchpin

The package, negotiated by the umbrella group for more than 450 financial firms, should set the basis for the decline of the Greek debt to gross domestic product ratio with an objective of reaching 120 percent by 2020, the IIF said. The deal with Merkel and French President Nicolas Sarkozy broke a deadlock and came hours after Dallara issued a statement that “there is no agreement on any element of a deal.”

“The details are important, but the fact that 17 euro leaders with all their different agendas managed to reach a deal is encouraging,” said Dirk Becker, a banking analyst at Kepler Capital Markets. “It might seem chaotic, but in the end the Europeans can find a solution, and if not they’ll keep trying.”

The Greek deal paved the way for euro leaders to announce an agreement on boosting the firepower of the rescue fund to 1 trillion euros ($1.4 trillion) and a 106 billion euro- recapitalization of European banks. The second crisis summit in four days delivered tools to extinguish the two-year-old crisis that threatens to ravage Italy and France and brake the world economy.

‘Only One Offer’

“We’re in a much better position than we were 24 hours ago, but there is still a big question over just how they intend to leverage the rescue fund up to one trillion, and how the banks are supposed to get to this 106 billion euros,” said Mike Trippitt, an analyst at Oriel Securities Ltd. in London.

The IIF last week proposed a loss of 40 percent on Greek debt, one person familiar with the discussions said at the time, after euro leaders pressured Greek investors to scale up a July accord that foresaw 21 percent losses for bondholders. Today’s agreement does include 30 billion euros in cash to sweeten the offer from the euro zone, officials said today.

“We really made only one offer,” Merkel told reporters after the summit. “The bank delegates took that back to their representatives. And this offer was specified in such a way -- and we said that it’s our last word -- that they took it up.”

To contact the reporter on this story: Aaron Kirchfeld in Brussels at akirchfeld@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net; Frank Connelly at fconnelly@bloomberg.net.

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