Tags: EU | Europe | Financial | Crisis

Officials: Greece Backstop Should Stabilize Euro

Friday, 26 March 2010 12:46 PM

European leaders on Friday said their hard-won deal to rescue debt-ridden Greece after months of bitter wrangling will help calm jittery markets and stabilize the euro.

Leaders of the 16 euro zone countries agreed Thursday to a plan to rescue Greece if it finds itself unable to borrow. The deal would provide individual loans from other euro zone countries and funding from the International Monetary Fund.

However, it sets out strict conditions, saying it could only be used as a last resort, and requires unanimous agreement of all euro zone members.

Greek Prime Minister George Papandreou insisted Friday that he did not believe his country would ever have to resort to the plan for aid. "I don't think we will need to revert to this mechanism," he said.

The day after the announcement, the euro recovered from a 10-month low against the U.S. dollar, to $1.3374 in midday trading in Europe from below $1.33 on Thursday.

The interest rate gap, or spread, between Greek 10-year bonds and equivalent German issues narrowed to 305 basis points Friday from about 330 on Thursday. The narrower the gap, the more positive the market's view of Greek bonds is.

Although the level still translates to roughly twice Germany's borrowing rate, Athens hopes the existence of the plan will reassure markets and lower the cost of borrowing.

Greece's debt troubles have undermined confidence in the euro by showing the weaknesses of the rules designed to support the 11-year-old shared currency. Those rules were supposed to keep governments from running up heavy debts, but didn't. The crisis has also exposed the euro zone's lack of a framework for helping a member state that runs into financial trouble.

Greece needs to borrow some 54 billion euros ($72.31 billion) this year and must refinance some 20 billion euros in April and May. It has been able to sell bonds but says it cannot keep paying the high interest rates investors have been demanding.

"I hope that financial markets will now act on fact and not on fiction," said EU Commission President Jose Manuel Barroso at the closing news conference.

Some analysts, however, remained cautious, noting dangers still lie ahead.

"The agreement last night ... clearly improves the country's financial outlook and could also ease some of the near-term pressure on the euro," said Jonathan Loynes, Chief European Economist at Capital Economics Ltd in London.

"But it would be wrong to think that the crisis is over. For a start, Greece is still going to have to pay a heavy price to meet its financing needs. Any loans would be at market interest rates, which are still very high. And more importantly, Greece still faces an extremely serious economic crisis," he said, noting that its economy would likely remain "stuck in a deep recession for some years."

With other euro zone countries such as Portugal and Ireland also facing long downturns to get out of fiscal trouble, "we suspect that any relief for the euro will be short-lived," he said.

Papandreou noted that the new plan could also be used by other countries if necessary, and that any nation making use of the plan could ask for whichever amount they need.

"We aren't recoursing to the mechanism," he said. "If a country does recourse to the mechanism, it will have as many funds as it needs. That is the logic of the loaded gun."

The deal was also reassuring markets, the prime minister said, adding that it would give the government breathing space to implement the harsh austerity program it announced last month.

"It is also sending a very positive message to the markets that they are backing Greece, Europe is backing Greece, Greece will not have any problems," Papandreou said. "I'm sure that we will succeed ... This is a new era that we have started."

German Chancellor Angela Merkel, who had vociferously opposed an immediate bailout for Greece, said she was "very satisfied" with the outcome.

"I think that it demonstrated Europe's capability to handle things and at the same time did something for the stability of the euro and for solidarity with a country that is in difficulty," Merkel said Friday.

"For us, it is also important in the long term that the euro, which is such a success for peace and unity, remains stable. Yesterday was an important day for the euro," she said.

Jean Claude Juncker, head of the euro zone finance ministers, said governments need to keep watching how currency and financial markets react.

"I personally think we took a good decision yesterday evening and that the financial markets will be reassured," he said.

He said no amount of a possible bailout for Greece was agreed upon, but two diplomats said that the total loans would be some euro22 billion.

Moody's credit ratings agency, however, said the political divisions among European leaders over how to handle the crisis had already damaged the region's credibility.

"The key credit question is whether, over the coming weeks and months, market confidence will be strengthened by the support package or whether it will be weakened by contentious conditions under which this package was agreed," said Pierre Cailleteau, managing director for sovereign risk at Moody's in London.

Greece shocked markets and other EU nations last year by admitting it had falsified statistics to make its budget deficit look lower.

Its 12.7 percent deficit for 2009 is four times over the EU limit, showing up the euro zone’s inability to restrict members' debt and deficits. Worries of a Greek default also highlighted the lack of a safety net for euro zone countries that can't pay their bills.

The new plan, to which contributions would be voluntary — sets up a possible rescue program for the first time.


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Friday, 26 March 2010 12:46 PM
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