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European Economy on the Right Road
Eurozone leaders have announced that an agreement had been reached with banks on a 50% write-off of Greek debt to pull the euro from the brink of disaster.
They also approved a complex mechanism to increase the Eurozone's main bail-out fund to €1 trillion (£880 billion) and had previously agreed to recapitalise vulnerable banks.
This ‘three-pronged’ agreement covers the main areas required to keep Europe out of immediate danger. A framework for these three measures will be put in place by the end of next month.
Mr Osborne announced that: "they have made very good progress on the key issues they need to make progress on. I think they got a good agreement.”
Much of the success of these agreements will depend on where the European economy goes from here. Mr Osborne did however warn that the plan is at risk of failing if leaders do not push the measures through rapidly. “Now we have got to maintain the pressure to put the package into place to actually fill in the blank spaces that remain and get the Eurozone into a much more stable position.” He also went on to say that: “We’ve got to turn what is a good package into something that’s actually got all the detail and is going to work in practice.
Under the deal, private sector banks agreed to start negotiations on a nominal 50% cut in bond investments to reduce Greece's debt burden by €100 billion, cutting its debts to 120% of GDP by 2020, from 160% now.
At the same time, the eurozone will offer "credit enhancements" or sweeteners to the private sector totalling €30 billion. The aim is to complete negotiations on the package by the end of the year, so that Greece has a full, second financial aid programme in place before 2012.
Markets reacted positively to this agreement, with the FTSE 100 Index opening 2% higher. Whilst the finer details of the deal will not become clear for several weeks, the overall shape of the agreement has been well received.
It will be very interesting to see where Europe goes from here. In the short term, eyes will be on the economic growth figures measured by GDP, as well as country-by-country reactions to further austerity measures.
Longer term, there is likely to be further political wrangling in order to reach the additional fiscal unity measures needed to secure the future of the eurozone.
Chartered Financial Planner