Eurozone deal

European markets stabilized in early trading Friday with investors remaining positive a day after European Union leaders agreed a three-pronged plan to dealing with the eurozone debt crisis.

Frankfurt's DAX gained around half a percentage point, whilst London's FTSE 100 index edged up 0.02 percent and the CAC 40 in Paris won a modest 0.23 percent. Markets had soared Thursday on the back of encouraging signals from EU leaders that they were tackling the crisis head on.

Banking shares also edged up, by 0.7 percent, after gains of nearly 9 percent on Thursday as the odds of a Greek debt default slimmed somewhat. A default would have led to huge losses for any banks holding Greek debt.

Stock markets in Asia were also still buoyed Friday by the results of the EU summit: Tokyo gained 1.39 percent, Sydney was 0.12 percent higher and Seoul closed 0.39 percent up. Hong Kong added 1.99 percent in the afternoon and Shanghai jumped 1.44 percent.

Meanwhile, the man charged with overseeing Europe's bailout fund, the European Financial Stability Facility, Klaus Regling, held talks with officials in China on Friday, which he said were part of regular consultations between Brussels and Beijing but were nonetheless timely given developments at Thursday’s EU summit.

"It's very important to be in contact with our major investors," the German economist said. "It's quite useful to come so soon after the summit."

Regling said he was "optimistic" about long-term cooperation with Chine, which "must invest every month" because of its large trade surplus.

There has been talk of China helping shore-up Europe's finances through measures such as buying up eurozone debt. French President Nicolas Sarkozy said Thursday that such a move would "in no way" threaten European financial independence.

The way forward

Under the EU plan to stabilize its finances, private banks will be required to accept a "haircut" of 50 percent losses on their Greek holdings in an effort to reduce the Mediterranean country's debt to sustainable levels. The deal would slash 100 billion from the 350 billion euros owed by Greece.

Germany's Chancellor Angela Merkel said this was the final offer, the carrot offered in favor of the stick, which would have been allowing Greece to default.

"We have done what needed doing," she said.

The deal between lobbyists representing private banks, heads of state and the International Monetary Fund also foresees a recapitalization of hard-hit European banks and a leveraging of the bloc's rescue fund, the European Financial Stability Facility, increasing it to 1.0 trillion euros ($1.4 trillion).

Italy also pledged to implement important restructuring measures, including cutting its 1.9 trillion euro debt and raising the retirement age to 67.

Undermining discipline?

But some economists were not so confident in the news. Andreas Freytag, professor of political economics at the University of Jena, told Deutsche Welle the Brussels deal is an invitation for fragile nations to slack off when it comes to austerity measures - because in an emergency other EU states will come to their aid.

"The debt crisis will only be resolved when this co-liability is put to an end," Freytag said. "As long as European taxpayers are liable for Greek, Portuguese, Italian, and at some stage even French and German problems, there will be no solution."

"Greece doesn't just need a debt haircut. It needs a write-down in real terms. And that's probably not possible without abandoning the euro … but nothing like that has been decided, which is why the latest deal is just a half measure."

Step by step

In a note released by analysts, Deutsche Bank said the deal "slightly exceeded the diminished expectations of last week."

"On balance we think the package should be seen as progress in the resolution of the euro crisis," analysts wrote.

Deutsche Bank's chief economist was similarly lukewarm.

"It is another milestone on the path towards the stabilization of the European currency union. But it's certainly not a final solution to the problem," Thomas Mayer told Deutsche Welle in an interview.

"The most important thing, really, is that the southern nations become competitive again," he said.

"It's not just important for Greece and Portugal … but especially so for Italy and Spain. Without comprehensive restructuring, without an 'Agenda 2020' for Italy and Spain, the problem will persist."

The euro surged on the news, breaching the $1.40 mark for the first time in almost two months. Markets in Asia reacted positively, while Europe stocks rose to a 12-week high.

Author: Stuart Tiffen, Rolf Wenkel
Editor: Sam Edmonds