Eurozone deal: Banks made an offer they couldn't refuse
The markets are cautious but in positive territory this morning as they view what is coming out of the eurozone summit in Brussels as less than required but better than no deal at all.
The latest plan to handle the eurozone's sovereign debt crisis did not emerge until the wee small hours of this morning and it gives us little more than the architecture of what has been agreed.
The building blocks are still missing. Even when they are put in place, many will regard them as inadequate.
The last part of the deal was the banks' "voluntary" agreement to take a 50% hit on their Greek debt. I put voluntary in quotes because, in the words of the Luxembourg Prime Minister Juncker, the banks were told by President Sarkozy and Chancellor Merkel that if they didn't agree they would face a "scenario of the total insolvency of Greece", which would bankrupt many banks.
So it wasn't voluntary: the banks were made an offer they couldn't refuse. Some bank shareholders might yet want to challenge this in the courts.
And 50% might not be enough. The Germans wanted 60%, the IMF thought 75% of Greek debt had to be wiped out to make Greece solvent.
Even with the 50% haircut Greek debt will still be 120% of its GDP by 2020, which is huge. Greece is currently in hock to the tune of 350bn euros. But only 210bn euros is in private (ie bank) hands. The remainder is with official creditors like the IMF and ECB, and they don't do haircuts.
So the 50% write-off only applies to the 210bn euros. Hence the call for more than 50%.
With the 50% haircut agreed (for now) the eurozone was able to confirm its 109bn euros recapitalisation of the banks, which we all knew about already. Again, many think it not enough: City commentators wanted closer to 200bn euros.
The recapitalisation is meant to fill the hole on banks' balance sheets left by the 50% write down of Greek debt. The Greeks will need 30bn euros (taking their latest bail out from just over 100bn euros agreed in July to 130bn euros now), Spanish banks 26bn euros , Italian 15bn euros, France 9bn euros , Germany 5bn euros and Portugal 5bn euros or more.
The deal doesn't say where this money will come from but implies banks should try first to raise the money themselves, then seek help from their governments with Europe as a last resort.
Given the state of the Greek, Italian and Spanish banks and their national governments it's a fair bet Europe will have to be their first port of call. The only good news is that Britain's banks are deemed to have adequate capital.
The third and most opaque part of the eurozone deal is the plan to increase the financial firepower of the 440bn euros bail out fund, known as the EFSF.
The first problem is that it's already down to 250bn euros , the rest having already been committed to bailing out Greece and elsewhere. The plan is to leverage that 250bn euros to 1 trillion euros or more. The markets wanted 2 trillion euros of "shock and awe" if contagion was to be avoided.
The EFSF will attempt leverage in two ways: by using the fund to offer financial guarantees on the first 20 or 30% of any new Spanish or Italian bonds in the event of a default.
This is designed to increase confidence in Italian and Spanish government debt and reduce its cost by lowering the yields they have to pay; and, second, by creating special purpose investment vehicles (Spivs!) seeded with EFSF money but topped up by cash-rich emerging markets like China, which would also buy European sovereign debt.
Suffice to say at this stage that the technicalities of this leveraging have a long way to go, as has the willingness of countries like China.
One final financial part of the deal which has not been much noticed is a eurozone plan to provide guarantees on new debt issued by banks.
They've found it hard to borrow in the current climate and the aim is to end the drought in the market for bank bonds. If this ever gets off the ground it could prove more important than the recapitalisation scheme because it would improve the liquidity of the whole banking system.
For Britain, which played only a walk on part in formulating this deal, the hope is that it will stop the eurozone tilting into recession, which would drag us with it. But there is an enormous political consequence too.
The Germans, who are bank rolling the deal, have made it clear that in return they want speedier move towards fiscal union and more central control of eurozone economies, including tougher scrutiny of national budgets, integration of tax systems and a new framework for running the eurozone, which means structures for the 17 which will rival those for the EU 27.
This inevitably means a new relationship between those inside and outside the eurozone.
Looks like Europe is going to stay at the centre of British politics for the foreseeable future, which is not necessarily good news for Mr Cameron or the coalition.