Markets Rally After E.U. Summit Shows Progress

The deal that is supposed to solve the European debt crisis has been unveiled, and financial markets like what they see — even though there isn't a lot of detail on some parts. Banks will take a big hit on Greek debt, the eurozone's bailout fund will be robust and a plan to recapitalize European banks emerged.

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Europe has a new plan to address its two-year-old debt crisis, and many investors are betting that it marks a turning point. The plan was drawn up over 10 hours of meetings at European Union headquarters in Brussels. Today, stock prices soared throughout Europe and the U.S. But as NPR's Jim Zarroli reports, some economists insist the plan leaves a lot of questions unanswered.

JIM ZARROLI, BYLINE: The meetings got under way late in the afternoon, and they dragged on so long it was beginning to look as though they would end in failure. Finally, a little after 4:00 this morning, came word of an agreement. Here was German Chancellor Angela Merkel.

CHANCELLOR ANGELA MERKEL: (Through translator) We are all more than aware that the world was watching us today and that it wants to see that we are fighting our way out of this deep European crisis. And I think that we Europeans have shown tonight that we have come to the right conclusions, that we have recognized the causes of this crisis, that we are dealing with the problems and we are a step closer to finding a solution.

ZARROLI: The plan is more comprehensive than anything presented before now. And Eswar Prasad, professor of international trade and economics at Cornell, says that in itself is a positive development.

ESWAR PRASAD: In that sense, the agreement from last night's summit is very important because it indicates a clear recognition by European leaders that they have to act on multiple fronts simultaneously in order to rebuild confidence in markets.

ZARROLI: But Prasad says the plan raises as many questions as it answers. For instance, Europe now has a stabilization fund meant to help out beleaguered economies like Italy and Spain. Prasad says the plan calls for the fund to be expanded from 440 billion to more than a trillion euros.

PRASAD: But European leaders have not provided any clear details about where that money is going to come from. So as of now, the trillion dollars is more a hope rather than a reality.

ZARROLI: European officials are hoping to persuade cash-rich countries like China and Brazil to contribute to the fund, but they haven't agreed to do so. The plan will also require banks to set aside more money against some of the riskier assets they hold, part of an effort to persuade investors that the banking sector is healthy. But with Europe's economy on the verge of a recession, many banks will have trouble raising the money.

PRASAD: If banks are trying to raise capital in a difficult environment, it's going to make them much less eager to lend.

ZARROLI: And if banks stop lending as much, it will only further weaken Europe's economy. Finally, the plan will ask banks and other investors to take a 50 percent write-down on the value of Greek bonds they hold. It's part of an effort to cut Greece's staggering debt load over time. But it's not clear how many investors will accept the write-down. And even if they do, Greece's debt load will still be sizable, just not as big as it is now. Simon Tilford, chief economist at the Centre for European Reform, says the problem is these efforts don't really get at the real challenges facing Europe.

SIMON TILFORD: They haven't addressed any of the underlying reasons why investors are shunning the debt of countries like Spain and Italy. They're shunning that debt because they don't believe those economies are going to grow sufficiently, quickly, to make their debts sustainable.

ZARROLI: Tilford says unless European governments and central bankers can find a way to stimulate growth, it will be hard to pare down the debt load of countries such as Greece and Italy. Still, after many months of half-measures and dithering, European leaders have finally come up with a kind of grand plan that investors have been looking for. If the plan is to live up to its initial promise, European officials will have to spend the next few weeks flushing out a lot of its details. Jim Zarroli, NPR News, Brussels.

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