Holes in the latest deal to save the euro zone

Leaders of the 17-nation euro zone agreed on a plan in the early hours of October 27 to slash Greek debt, strengthen European banks and try to stop the crisis spreading to Italy and Spain.

Financial markets have rallied on the agreement, but with much of the nitty gritty left to a euro zone finance ministers' meeting in November, investors are wondering if the deal will go the way of two previous packages that needed to be redone. Here are some of the holes in the euro zone's deal: On Greece Euro zone leaders persuaded bankers to take a 50% loss on the Greek bonds they hold via a voluntary bond swap. This is scheduled for the start of next year but no date has been set. However, the conditions of the bond swap are still unclear and there is no guarantee that all banks will sign up. At a previous summit, on July 21, representatives of financial institutions agreed to take a 21% write-down. But they later failed to achieve the 90% participation rate that economists say is needed for such a plan to work effectively. European banks only account for 85 billion euros of the 150 billion euros (USD 212 billion) of bonds available for the swap, according to J.P. Morgan. So the Institute of International Finance, which represents bondholders in talks with the euro zone, will need to work hard to persuade other investors. The biggest question is whether Greek debt becomes sustainable at 120% of GDP, the target the euro zone backed at the summit. With a weak economy, little manufacturing and no ability to devalue its currency, Greece is not forecast to return to strong economic growth for a long time, so could still struggle to service its borrowings. On multiplying the bailout fund's power

The euro zone aims to leverage the "firepower" of its rescue fund, the EFSF, to around 1 trillion euros (USD 1.4 billion). This means that the EFSF could provide funding of up to this amount, even though the facility only has a lending capacity of 440 billion euros. It would do this by combining its funds with bond insurance and special purpose investment vehicles. Such firepower would allow the EFSF to finance Spain and Italy for up to two years if they were shut out of capital markets, economists say. But how does the euro zone get to 1 trillion euros? After deducting the EFSF's existing emergency funding programs, the rescue fund has 250 million euros left from the original 440 billion. However, if Portugal or Ireland needed another bailout, that sum could be reduced even further. Multiplying the EFSF's power also increases the risks for top-rated European sovereigns, as the rescue fund and its guarantors would be forced to pay up if market attacks pushed Italy or Spain into default. The threat of a downgrade to France's triple-A credit rating raises another danger. If France, one of the EFSF's backers, were downgraded, that would make EFSF bonds less attractive and bond investors could become wary of any attempts to leverage it. The idea of raising the firepower via possible special purpose vehicles financed by sovereign wealth funds and other global investors is also full of doubt, as the incentives for China or Brazil to invest in euro zone bonds are unclear. China might use its position as a bargaining chip to gain greater access for its subsidised goods in the European market. Economists are asking how the special purpose vehicles would work and when they would be ready. "It is questionable whether there will be enough appetite ... to actually reach the mentioned firepower," ING wrote in a report. On an expanded role for the IMF

The summit conclusions say, "further enhancement of the EFSF resources can be achieved by cooperating even more closely with the IMF." But it is not clear what that means: When would the IMF pay up? How would such an arrangement work? These unanswered questions have a direct bearing on whether the euro zone really can get on top of the crisis rapidly. On the role of a reluctant ECB

All the while, as euro zone finance ministers are trying to resolve details that could take weeks or months, investors are concerned about Spain and Italy's liquidity. The euro zone is essentially relying on the European Central Bank to keep buying Italian and Spanish bonds. But will the ECB keep doing that? ECB president-in-waiting Mario Draghi has signalled he may be willing to do so, but outgoing President Jean-Claude Trichet told Reuters that investors may have read too much into his comments. Without the ECB, a critical backstop would be removed, as the newly enhanced EFSF is not going to be able to buy in the secondary or primary market until it has got all its structures in place. If the EFSF had to step in, its funds would be depleted, making the 1 trillion euro target harder to reach. Bank Recapitalisation

As part of the plan, banks have been given until June 30, 2012 to raise their core-capital ratios to 9% to enable them to withstand shocks from any possible default in southern Europe. The European Banking Authority says banks need to raise 106 billion euros (USD 150 billion) to do this, but the figure is still preliminary. But if banks try to reach that level by shrinking their balance sheets and limiting lending, that could imperil Europe's already weak economy. As Polish Finance Minister Jacek Rostowski pointed out on announcing the deal at the summit, "bank recapitalisation without the remaining elements, such as the so-called firewall... wouldn't have any chance of success." (USD 1 = 0.705 Euros)