- The Washington Times - Thursday, October 27, 2011

Markets worldwide - from Wall Street to Europe to Asia - celebrated a breakthrough deal on Greece’s debt Thursday with big gains, the Dow Jones industrial average closing above 12,000 for the first time in nearly three months.

Banks reached a deal with the European Union and International Monetary Fund that effectively would write off half of Greece’s $460 billion sovereign debt while Europe’s political leaders also agreed to firm up the continent’s banks and strengthen a European bailout fund to up to 1 trillion euros, or $1.39 trillion.

“It’s going to give [Greece] a lot more breathing room,” said John Workman, chief investment strategist at Convergent Wealth Advisors.

The markets responded well to the news, with Wall Street’s major indexes all gaining about 3 percent on the day. The Dow was up 339.51 points to 12,208.55 and the S&P 500 jumped 42.59 points to 1,284.59, the latter marking the first time since early August that S&P has been positive for the year. The Nasdaq composite gained 87.96 points, soaring to a close of 2,738.63.

“There’s no doubt that it’s progress,” President Obama told the media about the Greek debt deal. “So the key now is to make sure that there is strong follow-up, strong execution of the plans that have been put forward. But I was very pleased to see that the leaders of Europe recognize that it is both in Europe’s interest and the world’s interest that the situation is stabilized.”

He noted the threat that an unraveling of Europe’s economies and the collapse of the euro - the nightmare scenario from one or more sovereign-debt defaults - poses to the U.S. economy.

“It will definitely have an impact on us here in the United States. If Europe is weak, if Europe is not growing, as our largest trading partner, that’s going to have an impact on our businesses and our ability to create jobs here in the United States,” he added.

The U.S. markets also enjoyed a smaller boost from Thursday’s announcement of better-than-expected economic growth. According to government figures, the nation’s GDP was up 2.5 percent in the third quarter.

IHS Global Insight Chief U.S. Economist Nigel Gault pointed out that these growth figures happened in spite of a downgrade in the U.S. credit rating and the debt problems in Europe. “We can be more optimistic about the future,” he said.

As part of the Greece deal, the Institute of International Finance agreed on behalf of worldwide banks to accept 50-cents-on-the-dollar for Greek government bonds, giving Athens the time to get out from under its crushing debt-service costs, the goal being to reduce the country’s debt to 120 percent of its GDP by 2020.

The banks were open to writing off half the Greek debt, Mr. Workman explained, because the bonds were trading at only 30 cents on the dollar in the open market anyway.

“So they were willing to accept 50 cents on the dollar, because they figured, ‘Hey, this is better than what the market thinks it is,’ ” Mr. Workman said. “The banks recognized that they were never going to get $1 back on that debt, and for them it was all a matter of how much they were going to get.”

Investors are supposed to swap their Greek bonds in January, at which point Greece is expected to be rated as having defaulted on its debt.

The other principal provisions of the plan had European leaders asking their banks to raise almost $150 billion more by June for “rainy-day funds” and a major increase in the size of the European Financial Stability Facility. The Facility, currently valued at more than $600 billion, will insure against possible bond losses from eurozone countries and attempt to entice big institutional investors to buy eurozone bonds and recapitalize weaker banks.

“It provides a lot of confidence to people,” Mr. Workman said of the Facility’s “backstop” role.

What investors worldwide don’t want happening is other European countries following in the footsteps of Greece.

Greece, in terms of its debt, is not that large,” Mr. Workman explained. “The real concern is to not open the door to other countries sort of throwing up their hands and saying, ‘Hey, if you bailed out Greece, bail us out, too.’ “

While Portugal’s $225 billion debt and Ireland’s $207 billion debt also are concerns, the real fear is possible defaults by Italy and Spain, both much larger economies and both in much deeper debt - $2.58 trillion and $894 billion, respectively.

“They can’t just open the door to everyone,” Mr. Workman said. “They have to limit it to the neediest of needy.”

There are still political barriers too, as the deals require European leaders to make unpopular austerity moves in democratic countries.

“We found a good overall package for the next stage, but I think that we still have many more stages to go,” German Chancellor Angela Merkel told reporters in Berlin.

While Greek Prime Minister George Papandreou said the deal meant “a burden from the past has gone,” his left-wing opposition denounced the deal as imposing years of hardship.

Emerging economic giant China also warned that its huge reserves did not impose any burden on it. “Emerging economies should not be seen as the EU’s good Samaritans - in the end the EU has to pull itself out of the crisis,” the official Xinhua News Agency said.

Nevertheless, world markets responded positively, with European markets making the biggest gains. The Euro Stoxx 50 index soared more than 5 percent while the FTSE 100 index in London ticked up 2.5 percent.

Canadian markets also enjoyed a day of market increases. The S&P/TSX composite index was up 215.35 points to 12,401.41, while the TSX Venture Exchange gained 30.07 points to 1,600.86. Asian markets noticed similar gains. In Tokyo, the Nikkei 225 index gained 2 percent, while Hong Kong’s Hang Seng index was up 3.3 percent.