Euro-area leaders fanned out to persuade investors that last night’s array of crisis-fighting measures can help stop the debt turmoil that’s defied them for more than a year. German Chancellor Angela Merkel said government chiefs had learned from “systemic effects” in the single-currency area and widened the scope of their bailout fund to allow it to buy the bonds of debt-laden nations, support banks and offer credit lines. The agreement included new aid for Greece that embraced bondholders, prompting Fitch Ratings to say it will put a default rating on Greek debt. The risk is that the package will follow the pattern of previous agreements and eventually disappoint markets. Leaders declined to increase the 440 billion euro ($632 billion) fund, prompting economists from Citigroup Inc. to Goldman Sachs Group Inc. to question whether it’s big enough to insulate Spain and Italy from contagion. The onus also remains on Greece and other cash-strapped nations to keep delivering austerity measures. “The European Financial Stability Facility has gone from being a single-barreled gun to a Gatling gun, but with the same amount of ammo,” Willem Buiter, chief economist at Citigroup Inc. told Bloomberg Television’s “The Pulse.” “It needs to be increased in size urgently.” Ballooning Deficit (For a related story on bankers’ agreement to participate in a Greek bond exchange, click here. To read a story on credit- default swaps and the rescue package, click here.) The euro fell 0.3 percent to $1.4386 after rising as much as 1 percent. The yield on Italian 10-year bonds fell 1 basis point to 5.33 percent, while Spanish bonds of the same maturity dropped 4 basis points to 5.69 percent. Policy makers have fought a running battle to stamp out the crisis, which was sparked by Greece’s ballooning budget deficit. They moved too slowly to defend Greece in early 2010, before agreeing a bailout in April of that year that wrongly assumed the country would borrow in markets as soon as 2012. Leaders then set up a rescue fund which ran into opposition from national lawmakers and lacked the firepower initially assigned to it. Merkel reignited the turmoil in October by demanding investors help taxpayers cover the rescue costs, sparking a market rout that forced Portugal and Ireland to seek bailouts. ‘Very Clear Awareness’ Government chiefs said this time will be different. “Unfortunately, we’ve seen systemic effects in the euro area and now we’ve taken the necessary steps,” Merkel said. “Now there is a very clear awareness of what the causes are. We know what we need to do.” Spanish Prime Jose Luis Rodriguez Zapatero said the pact “should generate confidence and stability in the markets.” The agreement sparked a surge in Greek bonds even after it opened the door to a potential default through the involvement of private investors. The yield on Greek two-year debt plunged almost 800 basis points to 26 percent after rising above 40 percent yesterday. “The proposed debt exchange implies a 20 percent net present value loss for banks and other holders of Greek government debt,” Fitch said today. “An exchange that offers new securities with terms that are worse than the original contractual terms of the existing debt and where the sovereign is subject to financial distress constitutes a default event.” ‘Expressly Voluntary’ The International Swaps & Derivatives Association, by contrast, said participation of private bondholders in the Greek rescue plan “should not trigger credit-default swaps” on the nation because it’s “expressly voluntary.” Credit-default swaps on Greece plunged 500 basis points to a six-week low of 1,500 as of 12:15 p.m. in London, the biggest decline on record. That’s down from an all-time high of 2,568 basis points on July 18 and signals a 72 percent chance the government will default within five years, a figure that approached 90 percent earlier this month. Under the terms of last night’s agreement, Greece was promised 159 billion euros of new aid with lower interest rates and longer repayment times. The euro region and International Monetary Fund will contribute 109 billion euros, with banks chipping in 50 billion euros through bond exchanges and buybacks. ‘Significant Shift’ The decision to allow the EFSF to buy government bonds and offer IMF-style precautionary loans will protect the most indebted countries, said Andrew Bosomworth, a fund manager at Pacific Investment Management Co. in Munich. “That is a significant shift, a significant change in tack from the policies taken up to now, and that puts an extra line of defense ahead of those countries from financial markets,” said Bosomworth in an interview with Bloomberg TV. The aid still leaves Greece under pressure to cut a debt of around 143 percent of gross domestic product and may only delay a restructuring of the burden by one or two years, said Paul Donovan, deputy head of global economics at UBS AG. The economy is contracting for a third year and fiscal consolidation policies have already triggered riots. “This is fiddling around at the margins,” said Donovan. “The debt needs to halve.” The European Central Bank helped pave the way to an agreement after softening its opposition to a default when governments pledged to guarantee Greek collateral in money market operations. Possible Delay The test may come should investors again challenge the ability of Europe to contain the crisis to Greece, Portugal and Ireland. National parliaments need to approve the fund’s new powers, which could hold them up until September, said Laurent Bilke, an economist at Nomura International Plc. That may force the ECB to reactivate the bond-buying program it suspended in April, he said. Once enabled, the fund can still only buy bonds if sponsoring states agree. Economists at Royal Bank of Scotland Group Plc have argued the EFSF should be boosted to 2 trillion euros, while those at Bank of America Merrill Lynch say it would need to be increased by about 700 billion euros to comfortably cover the debt issuance of Italy and Spain until 2014. “The size of the EFSF may need to be revisited in the future if its greater scope and deterrent function can be put to work in practice,” said Francesco Garzarelli, chief interest rate strategist at Goldman Sachs Group Inc. “This tendency to ‘under-size’ otherwise good policy initiatives has been a recurrent feature of European policies.” To contact the reporters on this story: Simon Kennedy in Brussels at skennedy4@bloomberg.net To contact the editor responsible for this story: John Fraher at jfraher@bloomberg.net

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