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http://www.bloomberg.com/apps/news?pid=20601087&sid=azH_7GVjHRO4 »
March 16 (Bloomberg) -- European finance ministers laid the groundwork for a financial lifeline to debt-stricken Greece, breaking a taboo against aid to cash-strapped governments in order to avert a crisis for the euro.
Officials from the 16 countries using the currency worked out a strategy for emergency loans in case Greece’s plan for 4.8 billion euros ($6.6 billion) in tax increases and wage cuts fails to stave off fiscal disaster.
“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary,” Luxembourg Prime Minister Jean-Claude Juncker told reporters late yesterday after leading a meeting of euro-area finance officials in Brussels.
With the euro undergoing the harshest test in its 11-year history, the unprecedented pledge reflected concern that Greece’s budget woes could spread, poisoning investor confidence and aggravating the currency’s 10 percent decline against the dollar since November.
The meetings resumed at 9 a.m. today with all 27 EU finance ministers. The agenda also includes proposals to clamp down on hedge funds and credit-default swaps.
Aid to Greece would probably come through governments pooling funds to extend direct loans, said a European official who asked not to be named. The meeting didn’t resolve the size of future loans, which countries would offer them or how long they would last and cost.
Financial Stability
“The objective would not be to provide financing at average euro-zone interest rates, but to safeguard financial stability in the euro area as a whole,” the ministers said in a statement.
Greek bonds gained, pushing the 10-year yield down 4 basis points to 6.17 percent. The 10-year German yield rose 1 basis point to 3.16 percent. That trimmed the extra yield on Greek over German bonds to 300 basis points, the lowest since March 5.
“The clear hope is that the mere promise of support will reassure investors enough to bring Greek bond yields down further,” said Ben May, an economist at Capital Economics Ltd. in London. “But if this does not happen, euro-zone governments will come under greater pressure to provide further details.”
What would trigger the lending also was left open. Loan guarantees wouldn’t be part of the package, Juncker said. Final decisions will be up to EU leaders, though not necessarily at their next scheduled summit on March 25-26, he said.
‘Effective Premium’
“There is no loan facility at the moment,” Spanish Economy Minister Elena Salgado said before today’s session. “If this is the case, I’m sure all the euro countries will be there.”
Dutch Finance Minister Jan Kees de Jager said any contribution from the Netherlands would require “an effective premium on top of the cost of funding so that there will be also an incentive for Greece to refinance through the markets.”
Appeals for aid to Greece have raised hackles in Germany, the country behind the low-debt, anti-inflation policies that make the euro what the German high court said must be a “community of stability.”
German Finance Minister Wolfgang Schaeuble, who last week called for the expulsion of uncompetitive, debt-prone countries from the euro, quit his hospital bed two weeks after undergoing surgery to attend the meeting. He didn’t speak to reporters yesterday.
‘Tricky Game’
“It’s a very tricky game for politicians right now,” said Carsten Brzeski, an economist at ING Group in Brussels who used to work at the European Commission. “They have to play for time.”
While Greece this month sold 5 billion euros in bonds, it faces more than 20 billion euros in debt redemptions in April and May.
Doubts that Greece will tame Europe’s largest deficit on its own contributed to declines in German bonds last week amid concern that Europe’s largest economy will bear the bulk of the costs of a rescue package.
“What will happen if necessary, and we’re still convinced it won’t be necessary, is that we’ll reach an agreement in the euro zone to offer bilateral aid in a coordinated form,” Juncker said.
The euro weakened 0.7 percent to $1.3677 yesterday on concern that a protracted battle over a financial backstop for Greece would expose the flaws in how Europe manages the $12 trillion economy. It traded at $1.3673 at 9:20 a.m. Brussels time today.
‘Excessive’ Drop
“The euro is certainly not in danger,” European Central Bank President Jean-Claude Trichet told Euronews. “But we must not be complacent.”
The currency will rebound from the “excessive” drop as concern ebbs that Greece will default, JPMorgan Chase & Co. analysts including Jan Loeys, global head of market strategy in London, wrote in a March 12 research note. The euro may rally to $1.42 in the “short term,” they predicted.
Greek Prime Minister George Papandreou’s bid to cut the deficit to 8.7 percent of gross domestic product in 2010 from 12.7 percent last year hinges on quelling the unrest that led last week to the year’s second general strike.
More than 60 percent of Greeks back the austerity plans, while more than 52 percent doubt they’ll work, according to a Marc poll published this week in To Ethnos newspaper.
Greece’s Deficit
Greece’s deficit for the first two months of this year dropped 77 percent to 903 million euros, the Finance Ministry said on March 12.
Greece’s belt-tightening steps won the EU’s seal of approval, with Economic and Monetary Affairs Commissioner Olli Rehn hailing the “very bold and ambitious package of measures.”
The risk that Greece will be unable to repay its bond investors may be exaggerated, according to Standard & Poor’s.
“Capital markets have been overshooting relative to Greece’s fundamentals,” Moritz Kraemer, Frankfurt-based managing director of European sovereign ratings at S&P, said yesterday. “Greece’s default is very unlikely.”
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