Economic Outlook: Done deal

Now that European leaders are declaring a victory against the tides of government debt and bank weakness, the question is, will the plan work?

Once again, leaders in Brussels are pretending Greece is not in default by looking for private investors to voluntarily take a 50 percent loss -- in the vernacular, a haircut -- on the value of their Greek debt, which avoids a mandate that would technically constitute a default. And then, for lack of an agreement on changing the rules, leaders agreed in an all-night session to push the size of the European Financial Stability Facility to $1.4 trillion from its current size of $600 billion, about $200 billion of which is already committed to helping Greece.

The European Union will also add $150 billion to cushion the continent's 70 largest banks against the possibility of further economic deterioration.

One small glitch: To date, there has been no indication on the source of that $150 billion. That will give financial ministers a bone to pick when they gather to sort out the details later.

Politically, the deal marked a victory for France, which went into the talks determined to protect its banks, which are substantially invested in Greek debt. Germany would have accepted a plan for private investors to accept a steeper loss -- up to 60 percent, The Wall Street Journal reported Thursday.

But at some point the whitewash of calling a loss voluntary just wouldn't work, banks argued.

French President Nicolas Sarkozy reportedly called their bluff, telling banks if they didn't take the deal on the table, a disorderly default would be the result.

"France wanted to avoid the drama of a Greek default, when you remember the consequences of the failure of Lehman Brothers, and it's done," Sarkozy said after the meeting.

Will all this work? U.S. President Barack Obama and Chinese Premier Wen Jiabao have been calling on Europe to increase the "financial firepower" it throws at the problem but in some ways the deal is a fishing trip, a ruse, a giant smoke and mirrors scheme designed to fool investors that all is right on the continent.

As of Thursday morning, Italy's debt is still 120 percent of its gross domestic product and Spain's unemployment rate is still nearly 20 percent. Greece's economy is still expected to decline 5.3 percent this year. In Britain, the economy remains flat.

But investors, at first glance, liked the plan. In Japan, the Nikkei 225 index jumped 2 percent while the Shanghai composite index in China rose a more muted 0.33 percent. In Hong Kong the Hang Seng index gained 3.26 percent while in India the Sensex index added only 0.2 percent.

In Australia, the S&P/ASX 200 index rose 2.49 percent.

In midday trading in Europe, the FTSE 100 index rose 3 percent while the DAX 30 in Germany added 4.75 percent. The CAC 40 in France surged 5.52 percent while the Stoxx Europe 600 index climbed 3.38 percent.
ANTHONY HALL || United Press International