Greek leaders agree on austerity pact for bailout

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Greek political leaders have reached a deal with EU and IMF lenders on reforms required in return for a new bailout, the office of Prime Minister Lucas Papademos said in a statement on Thursday.

"The consultations between the government and the troika on the issue which remained open for further discussion were successfully completed this morning. The political leaders agreed on the outcome of these talks," Papademos' office said in a statement.

"There is broad agreement on the content of the new programme ahead of today's Eurogroup meeting," the statement said.

Financial markets have been awaiting the deal which would allow Greece to avoid a disorderly default that could disrupt global markets.

Earlier, a spokeswoman for the office of Greek Prime Minister Lucas Papademos said the agreement with the majority Socialists and the conservatives will allow alternative cuts to those rejected early Thursday during a meeting of the three coalition party leaders.

She spoke on a customary condition of anonymity.

Although all the other cuts demanded by Greece's eurozone partners and the International Monetary Fund were approved, party leaders had balked at new pension cuts.

Reuters and The Associated Press contributed to this report.

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Europe's leaders scramble to avert crisis

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Buddy can you spare a euro? France's President Nicolas Sarkozy, speaking at the Conservative European People's Party (EPP) congress in Marseille, warns that Europe's economy is facing huge risks.

By John W. Schoen, Senior Producer

As Europe's leaders gather for what some believe may be their last chance to preserve the continent's  monetary union, European central bankers slashed interest rates Thursday to ease a credit crunch that has sparked a euro zone recession.

Despite talk of bold new measures to tighten controls over members' spending and debt, though, there appears to be little chance that the eighth crisis summit this year, set to begin in Brussels late Thursday, will resolve the deep political divisions that have brought Europe to the brink of financial collapse. 

Just hours before leaders of the 17 nations joined by a common currency convene the summit, French President Nicolas Sarkozy echoed what many observers have been saying in the weeks leading up to the meeting.

"Never has the risk of Europe exploding been so big," he told a gathering of European Union leaders. "The diagnosis is that the euro, which should inspire confidence, is not inspiring this confidence. If there is no deal on Friday, there will be no second chance."

The current quandary has been building for more than a year, as have fears that one or more Europe’s most heavily debt-laden governments will default. Despite three bailouts, a cobbled patchwork of backstop funds, and multiple failed summits and proposed solutions, the crisis continues to envelop the European financial system and economy.

Investors are demanding ever–higher interest rates on government bonds to offset the risk they wont get their money back. European bankers are having a harder time raising capital, even as regulators have ordered them to build up bigger cash reserves. That’s made it harder, and more costly, for European businesses and consumers to borrow money.

The European Central Bank tried to douse the flames Thursday by cutting interest rates a quarter point to a record low one percent. But at a news conference following the rate cut announcement, ECB President Mario Draghi dashed hopes that the move signaled the opening round of a wider effort to to ease rising market pressure on interest rates with massive bond purchases.

Draghi's comments sent financial markets lower and further eroded confidence that Friday’s meeting will generate a meaningful solution to the crisis.

"One step forward, two steps back," said Alan Clarke, U.K. and euro zone economist at Scotia Capital. "The euro zone leaders might as well not bother. Pack their bags, go home, enjoy the weekend and do their Christmas shopping."

The latest plan being floated by Sarkozy and German Chancellor Angela Merkel would create a mechanism for automatic penalties on countries that don’t meet budget deficit targets. Euro zone countries would also be forced to include a balanced budget requirement in their constitutions.

Even if the 17 leaders agree to such a plan on Friday, it remains to be seen whether voters in member countries will go along.

Proposals for tough budget-balancing measures have been warmly received by investors. But they have generated violent protests in countries such as Greece that have enacted them. Deep spending cuts have also accelerated the euro zone's economic contraction. 

No matter what measures those leaders agree to, they will have little long-term impact without popular support.

“Because of the bumps in the road that will inevitably occur along the way, it will be too easy for politicians down the road, when it's not Merkel or Sarkozy, to blame it on the people who agreed to it at the time,” said  Steve Crawford, an investment banker with Centerview Partners. “I think some democratic process needs to occur because of the consequences that are likely to happen down the road.”

That process will take time, something many investors believe Europe has run out of. 

European voters, meanwhile, remain deeply divided over how to get the continent back on a sound financial footing. French voters are loathe to dilute their national independence by turning over control of budgetary decisions to a central European agency with the veto power over spending decisions. With a presidential election looming, Sarkozy faces rivals who are warning voters that he wants to sacrifice French sovereignty to unelected EU officials.

German voters, on the other hand, are opposed to any measure that would divert their taxes to the cause of bailing out weaker, free-spending countries. Merkel has also steadfastly opposed calls for the ECB to print euros to underwrite massive bond purchases; that’s largely due to the German public’s deep-seated fears of a recurrence of hyperinflation that sank the Weimar Republic in the 1920s. 

The Fast Money traders take a look at Mario Draghi's comments impacting stocks today and await former MF Global CEO Jon Corzine's testimony.

Consumer and business confidence has been sapped by the crisis, tipping the euro zone into a mild recession that threatens to deepen the longer leaders fail to arrive at a solution.

The ECB’s official forecast calls for euro zone gross domestic product to shrink by as much as a full percentage point next year. Some private forecasters, including IHS Global Insight’s chief European economist Howard Archer, think that assessment may not be pessimistic enough.

The ECB's rate cut follows a concerted move on Nov. 30 by central banks areound the world to supply the global capital markets with more cash and avert a wider credit crunch. The Federal Reserve has been working to put out the fire with a series of so-called “swap lines” that supply the ECB with dollars, which it then lends to European banks in exchange for dollar-denominated bonds. As other sources of dollar funding have dried up, European bankers have leaned heavily on those swaps, borrowing $50 billion this week. That’s up from $500 million in November.

Bond rating agency Standard & Poor's put more pressure on European leaders to solve the debt crisis by threatening to downgrade its risk assessment for all 17 countries that use the euro.  The warning Wednesday includes the European Union itself, along with large euro zone banks.

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EU leaders call on G-20 for more joint action

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BRUSSELS — Two European Union leaders have called on the upcoming G-20 summit of wealthy and developing countries to build on the EU plans to stabilize the eurozone and further boost the global recovery.

EU Council President Herman Van Rompuy and Commission President Jose Manuel Barroso wrote in a weekend letter to the leaders that there was "continued need for joint action" to get the world economy back on track.

Last Thursday's three-pronged EU deal appeared to have met expectations for some kind of major action and stock market rallied in Europe and around the world. The EU plan retools the eurozone's underpowered bailout fund, calls on banks to take 50 percent losses on Greek bonds and orders them to raise €106 billion ($150 billion) in new capital by June.

The G-20 leaders meet in Cannes, France, on Thursday and Friday.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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EU leaders call on G-20 for more joint action

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BRUSSELS — Two European Union leaders have called on the upcoming G-20 summit of wealthy and developing countries to build on the EU plans to stabilize the eurozone and further boost the global recovery.

EU Council President Herman Van Rompuy and Commission President Jose Manuel Barroso wrote in a weekend letter to the leaders that there was "continued need for joint action" to get the world economy back on track.

Last Thursday's three-pronged EU deal appeared to have met expectations for some kind of major action and stock market rallied in Europe and around the world. The EU plan retools the eurozone's underpowered bailout fund, calls on banks to take 50 percent losses on Greek bonds and orders them to raise €106 billion ($150 billion) in new capital by June.

The G-20 leaders meet in Cannes, France, on Thursday and Friday.

Copyright 2011 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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As crisis widens, Europe's leaders keep talking

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French President Nicolas Sarkozy and German Chancellor Angela Merkel met over the weekend and told reporters Monday they had worked out yet another plan to contain the widening financial crisis sweeping the continent. But they deflected questions about the plan's details.

By John W. Schoen, Senior Producer

More than a year after European officials began squabbling over solutions — and the continent's worst financial crisis since World War II has begun to engulf the banking system — the talking continues.

On Monday, Dexia, an embattled Franco-Belgian bank, became the first victim of the credit squeeze battering European lenders. European leaders moved to save the bank as the leaders of France and Germany emerged from yet another weekend of "emergency talks" on a coordinated plan to backstop European lenders.

“We are determined to do everything necessary to ensure the recapitalization of Europe’s banks,” Chancellor Angela Merkel said in Berlin after meeting with President Nicolas Sarkozy of France.

But the two leaders provided no details, leaving investors with little confidence that the plan will work.

"Now we have a plan to have a plan for recapitalization," said Steen Jakobsen, chief investment officer at Saxo Bank, a Danish investment bank. "We so many have plans for plans that I'm getting confused."

Though solutions remain murky, the problems facing Europe were brought into sharper focus by Dexia's failure. With no unified backstop in place, France and Belgium stepped in with $120 billion in loan guarantees for Dexia, which was taken over by the Belgian government.

As the crisis spreads, it's unclear how many more banks are at risk of being swamped by losses on holdings of government bonds issued by heavily indebted countries like Greece.

Now, as individual governments are forced to backstop their banks, the debt issued by those countries is being called into question. Moody's warned on Monday that it was reviewing Belgium's credit rating for a possible downgrade.

The risk is that Europe's governments find themselves caught in a vicious cycle. As Europe slides into recession, banks holding government bonds face losses if those bonds default. But without a coordinated plan to backstop failing banks, the burden will fall to individual governments. That cost of bank bailouts would further strain those government's budgets, increasing the risk of default.

"The governments that have problems with sovereign debt are recapitalizing banks that have problems with sovereign debt," said Adrian Schmidt, an investment strategist at Lloyds Bank. "It's getting somewhat circular."

Merkel and Sarkozy said Monday they would finalize the plan to backstop Europe's banks by the end of the month. But they offered no details, including the possible price tag for a unified program to provide more cash to the banking system.

There's widespread agreement that Europe's banks need more capital to weather the ongoing financial crisis. But there's little consensus over just how much they need. The problem is compounded by the steep drop in the price of Europe's bank stocks, which has made it harder for them to sell stock to raise cash.

The hope is that government pledges to backstop failing banks will help calm investors and provide bankers with more sources of private funding. But investors remain leery.

"I do not think being guaranteed by governments is any guarantee these days," said Jakobsen.

The announcement from Sarkozy and Merkel that a plan was near follows multiple failed attempts at a coordinated solution. Those have included a European version of the U.S. Troubled Asset Relief Program launched in 2009 to bail out American banks. Last year, European leaders cobbled together a so-called "financial stability facility," but that fund is now widely seen as too small to cover potential losses.

"We've been talking about Europe and potential solutions for months," said Scott Nations, President of NationsShares. "First it was leveraging the stability facility. And then they were going to do euro TARP. They're not coming to any conclusions or any solutions."

It remains to be seen how the latest plan will resolve the underlying threat of a debt default by Greece and other weaker economies. As the crisis has widened, the European Union's 17 member governments have remained split over a basic question: who should foot the bill?

Europe's leaders are running out of time to resolve that long-simmering debate. Over the weekend, Greek officials wrapped up the latest round of talks on the next $11 billion installment of an aid package needed to stave off a debt default. Without the payment, Athens is expected to run out of cash in the next few weeks. The latest round of proposals may be Greece's last chance to head off the financial collapse that has been looming for over a year.

But for now, the talking continues. On Monday, the EU announced that its next regular summit would be postponed by six days to Oct. 23 to allow time "to finalize our comprehensive strategy on the euro area sovereign debt crisis", according to European Council President Herman Van Rompuy.

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