The Deal Is Done - The Comprehensive Plan Is In Play

By Top Gun Team

The third leg of the �comprehensive plan� crafted by European leaders was put in place in the wee hours Thursday morning. Officials report that an agreement has been reached for existing bondholders of Greek debt to voluntarily accept a 50% writedown in the value of the bonds.

Although the banks/holders of Greek debt had publicly recognized that larger haircuts were needed, the talks on the exact amount had reportedly reached an impasse yesterday. However, French President Nicolas Sarkozy told reporters after the EU summit concluded late in the night, "We have reached an agreement, which I believe lets us give a credible and ambitious and overall response to the Greek crisis. Because of the complexity of the issues at stake, it took us a full night. But the results will be a source of huge relief worldwide."

The increase in the size of the writedowns of Greek debt occurred due to the fact that the 21% haircut agreed to on July 21 did not have much of an impact on Greece�s overall debt-to-GDP ratio. The new deal, will more significantly impact Greece�s debt burden. According to Reuters, the 50% writedowns will cut Greece�s debt by �100 billion, allowing the crucial debt-to-GDP ratio to be cut to 120% by 2020.

Reuters reports that in exchange for the voluntary writedown on Greek debt, the Eurozone will offer "credit enhancements" to the private sector totaling �30 billion.

Although the general deal has been reached, there are many details that remain to be worked out. EU leaders say that the goal is to complete negotiations on the package by the end of the year, so that Greece has a full, second financial aid program in place before 2012.

As was reported on Wednesday, EU leaders also agreed to leverage the EFSF bailout fund �several fold� and that Finance Ministers will determine the details of the exact amounts in November.

After pledging support to Greece, Ireland, and Portugal, the EFSF, which initially totaled �440 billion, currently has about �290 billion available. The wires reported yesterday that the leverage of the EFSF is expected to be on the order of 4X. Thus, from a base of �250-275 billion, the ultimate �firepower� of the bailout fund will be $euro;1.0 � 1.1 trillion.

While the details relating to the mechanics of the EFSF leveraging will continue to be hashed out by finance ministers, European Union President Herman Van Rompuy said the leverage effect would multiply the power of the fund by a factor of four to five.

Van Rompuy added, "The leverage could be up to one trillion (euros) under certain assumptions about market conditions and investors' responsiveness in view of economic policies."

According to the reports, the EFSF will have the flexibility to deploy two leveraging models simultaneously: the �first-loss insurance� model and the public/private special purpose fund.

Wire reports say that the Special Purpose Vehicle within EFSF will be used to increase resources for the bank recapitalization and for buying bonds in the primary and secondary market. The bond purchases on the secondary market are a means to combat contagion and keep rates low.

Reuters says that additional enhancements to the EFSF are possible through cooperation with the IMF. Recall that earlier today there was a report that the Chinese were considering participating in the special purpose fund via the IMF.

Leaders of the summit are championing their accomplishments with Germany�s Angela Merkel telling reporters, �The world�s attention was on these talks. We Europeans showed tonight that we reached the right conclusions.�

French President Nicolas Sarkozy told reporters after the conclusion of the meeting, "The summit allowed us to adopt the components of a global response, of an ambitious response, of a credible response to the crisis that is sweeping across the euro zone."

Stock markets around the globe have soared on the news with Japan up +2.04%, Honk Kong up +3.26%, UK +2.85%, France +5.14%, Germany�s DAX +4.49%, Italy +4.78%, and Spain +3.92%. US stock futures currently are pointing to a gain in the DJIA of more than 200 points at the open.