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EuroDeal 101: Five basics of the new agreement

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As my colleagues Howard Schneider and Michael Birnbaum report this morning, European leaders have agreed on a plan intended to stem the continent’s debt crisis. Here are five things to know about what happened last night across the Atlantic:

1. The big ticket item: investors to Greece take a hit.

Petros Giannakouris

AP

Major, private investors in Greek bonds signed on to a voluntary agreement to take a 50 percent loss on the value of their bonds. Both analysts and banks point to this part of the deal as particularly important because of the threat Greece’s teetering economy poses to the rest of the continent. In the short term, this is a loss for investors. But, in the long term, it has the potential to be a win, so long as easing Greece’s debt burden can get the rest of the European Union on more stable footing.

2. The bailout fund gets bigger. A lot of the action centers on the European Financial Stability Facility, which is the fancy title for the bailout fund that Europe created last year. The idea behind the fund — nicely explained in this Planet Money podcast — was to make investments in European bonds seem more stable and secure, backed by a big pool of money. Today’s deal aims to grow the fund by a factor of four, to $1.4 trillion. That’s supposed to increase confidence in government bonds with stronger backing from some of the continent’s most robust economies.

3. Banks agree to raise more capital. In another move meant to shore up confidence, European banks are said to have agreed to raise as much as $150 billion in new capital. This could, as Schneider and Birnbaum report, serve as buffer against possible losses they’ve suffered as the value of government bonds have declined.

4. Details are still forthcoming. A lot of really important details still need to get sorted out, which is why you see headlines like “A (Big?) Deal” and “Europe’s Half-Baked Deal.” Take, for example, the idea of strengthening the European bailout fund. We know European leaders want the fund to get bigger, but we don’t know how they’ll do so. As Reuters’ Felix Salmon notes, it “can’t just borrow $750 billion from its friendly prime broker. So where’s the extra money going to come from?” There’s no clear lender yet.

5. Are we out of the woods? Not quite.Markets across the world seem to like today’s deal, but the European debt mess is, well, still a mess. And with details still being hammered out, some economists have doubts about whether it will actually stem the continental debt crisis. As Neil Umack notes, even with all the reductions in repayments of Greek bonds, Greece could still end up with a bigger debt burden than it did before the crisis. Or, as Jens Larsen, chief European economist at RBC Capital Markets told Bloomberg, “It remains a deal long on intentions and short on details. Until we know how the mechanisms will work, it will be hard to judge whether this will be sufficient to entice investors to provide support to European governments.”

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