European leaders cajoled bondholders into accepting 50 percentwritedowns on Greek debt and boosted their rescue fund's capacityto 1 trillion euros ($1.4 trillion) in a crisis-fighting packageintended to shield the euro area.

The 17-nation euro and stocks climbed while bond spreadsnarrowed after leaders emerged early today from a 10-hour summit inBrussels armed with a plan they said points the way out of thequagmire, albeit with some details still to be ironed out.

“Overall the outcome is better than we anticipated one weekago,” Laurent Bilke, global head of inflation strategy at NomuraInternational Plc in London, said in an interview. “There areseveral issues left open, but I do believe that getting a morenecessary debt relief for Greece is a pretty important step.”

Last-ditch talks with bank representatives led to thedebt-relief accord, in an effort to quarantine Greece and preventspeculation against Italy and France from ravaging the euro zoneand wreaking global economic havoc. Greek Prime Minister GeorgePapandreou will address the nation at 8 p.m. in Athens to outlinethe summit's ramifications for the country at the eye of thetwo-year sovereign debt crisis.

“The world's attention was on these talks,” German ChancellorAngela Merkel told reporters in Brussels at about 4:15 a.m. “WeEuropeans showed tonight that we reached the rightconclusions.”

ECB Role

Measures include recapitalization of European banks, apotentially bigger role for the International Monetary Fund, acommitment from Italy to do more to reduce its debt and a signalfrom leaders that the European Central Bank will maintain bondpurchases in the secondary market.

The euro advanced to a seven-week high against the dollar,rising above $1.40 for the first time since September. It was at$1.4007 at 11:48 a.m. in Brussels. The Stoxx Europe 600 Indexsurged 2.6 percent.

“It's long on words, short on detail,” said Peter Dixon, aneconomist at Commerzbank AG in London. “The solution that's beenput in place now gives us enough ammunition to stave off anyimmediate problems but we may well run into other problems down thetrack.”

The summit was the 14th in the 21 months since Europe pledgedsolidarity with Greece, and came amid mounting global pressure forthe bloc to deliver a credible anti-crisis toolkit before a Groupof 20 meeting Nov. 3-4 in Cannes, France.

Banks Summoned

Europe's leaders took the unusual step of summoning the banks'representative, Managing Director Charles Dallara of the Instituteof International Finance, into the summit to break the deadlockover how to cut Greece's debt to 120 percent of gross domesticproduct by 2020 from a forecast of about 170 percent next year.

Dallara squared off with a group led by Merkel and FrenchPresident Nicolas Sarkozy around midnight after issuing an e-mailedstatement that “there is no agreement on any element of adeal.”

Sarkozy said the bankers were escorted in “not to negotiate, butto inform them on decisions taken by the 17 and then theythemselves went on to think and work on it.” Luxembourg PrimeMinister Jean-Claude Juncker said the banks' resistance was brokenby a threat “to move toward a scenario of total insolvency ofGreece, which would have cost states a lot of money and which wouldhave ruined the banks.”

Insolvency Threat

The resulting “voluntary” losses by bondholders were the keyplank in a second bailout for Greece, which was awarded 110 billioneuros in May 2010 at the outbreak of the crisis. The new programincludes 130 billion euros of official aid, up from 109 billioneuros envisioned in July.

The Washington-based IMF, meanwhile, said it is ready todisburse its 2.2 billion-euro share of the next installment ofGreece's original bailout. The release of the euro zone's 5.8billion-euro share was approved last week.

Greek, Spanish, Italian and French bonds all rallied today, withthe spreads over benchmark German bunds narrowing. The yield onGerman 10-year bonds jumped eight basis points, the most in morethan 11 weeks, to 2.11 percent at 10:05 a.m. London

The yield on Greek bonds due in October 2022 fell 117 basispoints to 24.15 percent, Spanish 10-year yields dropped 16 basispoints to 5.32 percent and Italy's 10-year bonds advanced for asecond day, with yields falling 13 basis points to 5.81percent.

ECB President Jean-Claude Trichet, who has warned against thespillover effects of bond writedowns on the banking system, didn'ttake part in the confrontation with bankers on the debt relief. Helater praised the leaders' determination to get ahead of thecrisis.

Trichet's Call

The measures agreed “have to be fully implemented, as rapidlyand effectively as possible,” Trichet, who leaves office Oct. 31,said afterwards.

Leaders tiptoed around the politically independent ECB's broaderrole in keeping the euro sound, making no mention of itsbond-purchase program in a 15-page statement. The Frankfurt-basedcentral bank has bought 169.5 billion euros in bonds so far,starting with Greece, Ireland and Portugal last year, thenextending the coverage to Italy and Spain in August.

While Trichet didn't mention the controversial purchases either,his successor, Mario Draghi of Italy, indicated that the policywill continue. Speaking in Rome yesterday, Draghi said the ECBremains “determined to avoid a poor functioning of monetary andfinancial markets.”

Leaders backed two ways of leveraging up the 440 billion-eurorescue fund, which was designed last year to shield smallercountries such as Greece, Ireland and Portugal, and lacks the heftto protect Italy, the euro area's third-largest economy.

Leverage Options

Under plans to be spelled out in November, the fund will be usedto insure bond sales and to create a special investment vehiclethat would court outside money, from public and private financialinstitutions and investors.

Canadian Prime Minister Stephen Harper, speaking at a conferencein Perth, Australia, called the agreement “grounds for cautiousoptimism,” and urged European leaders to work out details of theplan and implement it.

Europe cast about for more international money to aid therescue, with France's Sarkozy set to call Chinese leader Hu Jintaotomorrow with the goal of tapping into the world's largest foreignexchange reserves.

While the mechanics are a work in progress, European UnionPresident Herman Van Rompuy said the leverage effect would multiplythe power of the fund by a factor of four to five. He compared itto normal banking business that needn't entail excessive risks.

'Detail Further'

“It will be important to detail further the modalities of howthis enhanced EFSF will operate and deliver the scale of supportenvisaged,” IMF Managing Director Christine Lagarde said.

Europe also struck a bank-recapitalization accord, setting aJune 30, 2012, deadline for lenders to reach core capital reservesof 9 percent after writing down their sovereign-debt holdings.Banks below that target would face “constraints” on payingdividends and awarding bonuses, a statement said.

The European Banking Authority estimated banks' capital needs at106 billion euros, with Spanish banks requiring 26.2 billion eurosand Italian banks 14.8 billion euros. It gave them until Dec. 25 tosubmit money-raising plans to national supervisors.

Banks that fail to raise enough capital on the markets willfirst tap national governments, falling back on the EFSF rescuefund only as a last resort.

Bloomberg News

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