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Europe

Eurozone leaders agree on rescue package for Greece

Video by Rebecca BOWRING , Alix LE BOURDON

Text by News Wires

Latest update : 2010-03-26

Leaders of the 16 countries that share the euro currency have endorsed a Franco-German rescue deal to help Greece overcome its debt crisis. The aid plan includes a mixture of IMF funding and bilateral loans from eurozone partners.

REUTERS - Euro zone leaders agreed on a joint European-IMF financial safety net for debt-stricken Greece on Thursday after weeks of wrangling, hoping to restore confidence in their common currency.

Under the accord, which Greek Prime Minister George Papandreou called satisfactory, Athens would receive coordinated bilateral loans from its euro zone partners and International Monetary Fund assistance if it faced severe difficulties.

The euro fell to a 10-month low against the dollar as investors took the initial view that IMF involvement suggested the 16-nation euro zone was unable to handle its problems alone.

The agreement included no numbers, but a senior European Commission source said the support package would be worth 20-22 billion euros ($27-29 billion) if required in an emergency.

However, tough terms imposed by German Chancellor Angela Merkel mean the mechanism could be activated only under strict conditions and would require the unanimous approval of the euro zone, giving Berlin a veto.

“There’s an agreement. We’ve given the signal that had to be given,” Portuguese Prime Minister Jose Socrates told reporters. “It’s a show of solidarity.”

Greek Finance Minister George Papaconstantinou said the deal removed the risk of default by his country, but he and German officials said no aid was being given to Greece now.

At Berlin’s insistence, euro zone leaders also called for proposals by the end of the year to tighten the bloc’s battered budget discipline rules, which failed to prevent Greece running up giant deficits and public debt.

The cost of insuring Greek debt against default fell on news of the agreement, clinched first by the leaders of Germany and France, and the premium investors charge for holding Greek bonds rather than benchmark German bunds narrowed.

But it remained more than double the spread charged on fellow euro zone weaklings Ireland and Portugal, and four times that of Spain.

The European Central Bank also took a step to support Greece by extending softer rules on collateral so Athens does not risk a guillotine on its debt at the end of this year.

Under the arrangement, euro zone countries would provide the majority of any funding for Greece on rigorous conditions recommended by the European Commission and the ECB. The IMF would contribute one-third of the money and its expertise.

“This mechanism, complementing International Monetary Fund financing, has to be considered ultima ratio (last resort), meaning in particular that market financing is insufficient,” the agreement said.

Many details remained unclear, such as the division of responsibilities between the IMF and the euro zone in a rescue.

EU sources said that although no figures were announced, euro zone countries would shoulder two-thirds of the burden of financing the package and the IMF would provide one-third.

After saying for weeks she would not agree to any aid for Greece, Merkel signalled in parliament that she would accept a contingency plan provided the IMF was involved and EU partners agreed to toughen the bloc’s budget deficit rules.

“A good European is not necessarily one who offers help quickly. A good European is one that respects the European treaties and national rights so that the stability of the euro zone is not damaged,” she said.

 

ECB Lifeline

Some euro zone states, notably France, and ECB policymakers have previously opposed IMF involvement, arguing that such a move would underscore the single currency area’s inability to solve the deepest crisis in its 11-year existence on its own.

“If the IMF or some other body exercises the responsibility in lieu of the Eurogroup or instead of governments, it is evidently very, very bad,” ECB President Jean-Claude Trichet told France’s Public Senat television in an interview.

Greek Prime Minister George Papandreou told reporters his country would press ahead with painful austerity measures to slash a huge budget deficit.

Trichet earlier gave Athens some good news, announcing that the central bank would extend looser collateral rules, due to expire at the end of this year, into 2011.

Greece was at risk of having its bonds rejected as collateral for refinancing with the expiry of the relaxed rules, potentially triggering an even deeper liquidity crunch.

Athens is still saddled with borrowing costs more than double those of Germany and must borrow some 16 billion euros between April 20 and May 23 alone to refinance maturing debt.

Greece says a standby aid package from the EU will reassure credit markets and avert the need for it to request aid.

In Germany, Europe’s biggest economy, there is overwhelming public opposition to any bailout for Greece, fuelling fears that direct euro zone assistance would face legal challenges at home.

Merkel has an extra incentive to stick to her guns ahead of a crucial state election on May 9, where defeat would erase her centre-right majority in the upper house of parliament.

Without a fallback mechanism, EU leaders fear Greece’s debt problems could spread to other countries in the euro zone including Portugal, Spain or Italy.

Fitch downgraded Portugal’s sovereign debt rating by one notch to AA- on Wednesday. The Portuguese parliament passed a resolution backing the minority socialist government’s austerity programme on Thursday after the main opposition party abstained.

 

Date created : 2010-03-25

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