Deal is a 'rubik's cube' of EU calculations

Within seconds the reply came back: “Yes, but we don’t understand how.”

Number-crunchers, market analysts and others with a head for figures were today also trying to understand the complex financial magic in which a bail-out fund has been “leveraged” to turn it from a current pot of about 250bn euros into one of closer to one trillion euros.

They were also asking who is going to pay for a €100bn top-up of European banks to bolster their capital as a bulwark against further economic breakdowns.

A deal to waive 50% of Greek debts to the banks was also being examined under the microscope to see how the figures work and what the real long-term effect will be on the banks themselves and on the Greek economy.

“It’s a clever piece of financial engineering in which everyone promises to pay everyone else and the whole thing exists on a Rubik’s cube of arithmetical calculations – but that does not necessarily mean it’s a bad thing,” said one summit observer.

“It’s only when things go wrong that you learn whether the construction deal is based on solid foundations – ironically rather like some of the sub-prime mortgage schemes and bank lending arrangements that got the economy into this mess in the first place.”

In the early hours EU leaders delivered the results as a breakthrough but were unable or unwilling to produce their calculations.

On topping up the current crisis bail-out fund – the European Financial Stability Facility – the summit conclusions say the idea is to “leverage” the existing resources by “providing credit enhancement to new debt issued by member states, thus reducing the funding cost. Purchasing this risk insurance would be offered to private investors as an option when buying bonds in the primary market”.

A second option involves “maximising the funding arrangements with a combination of resources from private and public financial institutions and investors, which can be arranged through special purpose vehicles. This will enlarge the amount of resources available to extend loans, for bank recapitalisation and for buying bonds in the primary and secondary markets.”

The declaration says: “The leverage effect of each option will vary, depending on their specific features and market conditions but could be up to four or five.”

In other words the current bail-out kitty, which now contains about €250bn, could have “firepower” equivalent to a pot of one trillion euros.

EU officials were reluctant to use the magic “trillion” figure – until French President Nicolas Sarkozy did so in his post-summit press conference.

But one official from another national delegation said: “The figure should be treated with caution.”

On the recapitalisation of the most exposed banks the conclusions say the enforced top-up of about €2bn should be raised by the targeted banks via private investors.

However, if that is not possible, “national governments should provide support, and if this support is not available, recapitalisation should be funded via a loan from the EFSF.”

Analysing the accord, one eurocrat said: “It suggests that the bail-out fund eurozone governments set up using taxpayers’ cash might end up financing the topping up of bank funds which is being imposed on the banks by those same governments to ensure the banks can withstand any losses incurred because of struggling economies failing to repay their debts.”

Which leads to the third part of the deal, under which banks will only get back half of the loans Greece is supposed to repay.

“The package we have agreed is a comprehensive package that confirms that Europe will do what it takes to safeguard financial stability,” said European Commission President Jose Manuel Barroso today.

Analysts already agree that the summit has delivered on its three promises - but the markets will ultimately decide whether this amounts to the long-term strategy for cracking this crisis once and for all.