Banks finally agreed to a 50 percent haircut on their Greek debt holdings on Thursday. Reuters reports:
Under the deal, the private sector agreed to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece's debt burden by 100 billion euros, cutting its debts to 120 percent of GDP by 2020, from 160 percent now.
At the same time, the euro zone will offer "credit enhancements" or sweetners to the private sector totalling 30 billion euros. The aim is to complete negotiations on the package by the end of the year, so Greece has a full, second financial aid programme in place before 2012.
While the purportedly voluntary nature of the deal could undermine confidence in the CDS market, on the whole, markets reacted very positively to the news. The S&P 500 jumped 3.4 percent on Thursday and the STOXX Europe 600 surged 3.6 percent. The yield on US Treasuries and German bunds rose while those on Greek, Italian and Spanish bonds fell. The euro surged the most in more than a year.
However, even as the debt deal boosted markets, economic data from the euro area were somewhat less encouraging. The European Commission reported on Thursday that its economic sentiment indicator slipped to 94.8 in October from 95.0 in September.
While markets were mostly focussed on Europe, policy-makers were also active elsewhere. The Bank of Japan announced further monetary easing on Thursday. It said that it would boost its asset buying fund by 5.0 trillion yen to 55 trillion yen while keeping interest rates unchanged.
The BoJ also announced on Thursday that it had cut its forecast for Japan's growth in fiscal year 2011 to 0.3 percent from a July forecast of 0.4 percent. For 2012, it lowered its forecast to 2.2 percent from 2.9 percent.
Growth seems less of a concern for the time being in the US. A report on third quarter GDP on Thursday showed that the US economy grew at a 2.5 percent annual rate, the fastest pace in a year. However, another report showed that pending home sales fell 4.6 percent in September.