EU rushes to keep debt-crisis deal alive

BRUSSELS, Oct. 28 (UPI) -- Eurozone officials rushed to prevent the latest debt-crisis deal from unraveling after a warning it depended on high risk similar to what triggered the crisis.

The deal's highly leveraged assets and contracts, used to swell the main eurozone bailout fund on paper to $1.4 trillion from the $350 billion without putting any new money into the pot, "are not too different from those which were partly responsible for creating the crisis, because they concealed risks," influential economist and German central bank President Jens Weidmann told a Munich financial conference.

Germany's economy is Europe's largest and most powerful.

In addition, the European Union forecast of Greek debt dropping to 120 percent of gross domestic product by 2020, from the current 160 percent, is based on Greece's economy growing 2 percent a year -- while it is currently contracting 5.5 percent, other economists said.

Analysts say Greece's debt must be 80 percent of GDP before the country can return to financial markets.

EU officials conceded to reporters Thursday the deal to cut Greece's debt in half and increase the main bailout fund to $1.4 trillion was, in effect, a box whose contents was not fully defined, Britain's Guardian reported.

The EU officials said more should become clear by the time of the Group of 20 summit meeting in Cannes, France, Nov. 3 and 4, but they still needed a few weeks beyond that to come up with a full-fledged deal and a swap of Greek bonds early next year.

Explaining the swap in which private banks and insurers take a "voluntary" 50 percent loss on the face value of their Greek debt, officials said bondholders would be asked to exchange Greek bonds with a face value of 100 euros for ones of 50 euros. Of the 50 euros, 35 euros would be straight Greek debt but the remaining 15 euros would be triple-A debt because of EU and bailout-fund guarantees.

The interest rate and maturity of the new bonds was not yet decided, the officials said.

EU leaders promised in the coming weeks to approve the creation of a so-called special purpose investment vehicle to attract money from cash-rich countries such as China and Brazil. This fund, set up with the International Monetary Fund, would be in addition to the main bailout fund, known as the European Financial Stability Facility.

Talks between EFSF Chief Executive Officer Klaus Regling and Chinese bond buyers were to begin in Beijing Friday to discuss China's possible investment in the bailout fund or the special-purpose fund.

China has $3.2 trillion in foreign-exchange reserves -- with roughly a quarter of that, or $800 billion, believed to be in euros.

China would likely contribute $50 billion to $100 billion to the EFSF or the new fund, but there would be key conditions, two senior Chinese-government advisers told the Financial Times.

One condition might be that European leaders stop criticizing China's currency policy, a frequent source of tension with trade partners, Center for China in the World Economy Director David Li Daokui, a member of China's central bank monetary policy committee, told the newspaper.

Europe and Washington often say China intentionally undervalues its currency to boost Chinese exports.

Another condition would likely require Europe to offer Beijing strong guarantees on the investment's safety, Li and Yu Yongding, a former committee member, told the newspaper.

"The last thing China wants is to throw away the country's wealth and be seen as just a source of dumb money," Li said.