Europe Agrees to Aid Greece, but Is Unsure of How to Help

Europe Agrees to Aid Greece, but Is Unsure of How to Help
By STEPHEN CASTLE
Copyright by The New York Times
Published: February 10, 2010
http://www.nytimes.com/2010/02/11/business/global/11union.html?hpw


BRUSSELS — The crisis in Greece brought Europe’s leaders together on one issue Wednesday: The need for emergency action to keep the problem from infecting Europe’s other weak economies. But an accord on who will take the lead — and how — appeared uncertain.

European officials face greater urgency to devise a bailout for Greece after fears its government might default caused a recent slump in financial markets worldwide.

A phalanx of European leaders put on a unified show of support ahead of a summit meeting Thursday in Brussels, where the heads of all European Union governments and the finance ministers of the 16 countries that use the euro are scheduled to appear. Together with the president of the European Central Bank, Jean-Claude Trichet, the officials agreed Wednesday that they could no longer allow uncertainty about the future of Greece — and the euro zone — to disturb global investors.

Some officials said the meeting might achieve little more than a political statement, leaving details to be worked out later by finance ministers.

German officials also insisted that no formal decision had been made.

A crucial point in the discussions is whether the government in Athens should be offered loan guarantees or given additional loans to help meet a looming debt payment, or whether there should be a pledge to buy Greek government bonds should the need arise. Investors like the concept of having one or several creditworthy nations, like Germany, guaranteeing the debts of a poorer nation, although such a move would be largely without precedent.

Germany and France are expected to have to take the lead on any emergency solution, especially after European officials rejected allowing Greece to go the International Monetary Fund — which often provides financial aid to emerging markets — for help. Going to the fund is considered a highly undesirable option for any of the 16 countries that use the euro currency.

Officials are worried about the “moral hazard” of any Europe-backed solution for Greece: If one country is bailed out by the others, investors will expect a similar response should other weak economies that use the euro, including Portugal and Spain, fall into serious trouble.

There are also questions about how to apply any commitments so that the weaker governments would be pressured to deliver painful economic overhauls.

The talks, which included a discussion of what steps Greece might be required or even forced to take to deal with its own financial problems, came as Greek citizens demonstrated in protest against austerity measures so far announced by the government, which many market participants think are far from adequate.

“At this junction they will have to support Greece,” Simon Tilford, chief economist at the Center for European Reform, said of Europe’s politicians. “If you have encouraged the markets to believe that support is forthcoming and then it is not, we will see a backlash” in financial markets.

Though Mr. Tilford said the markets would ideally like to see some form of guarantee extended to Greek loans, he added that this would probably be too much for the government in Berlin. The most likely outcome was a loan facility extended on condition that changes were undertaken by the government in Athens. It would also need to apply to other countries facing similar ills.

The summit meeting Thursday was called by Herman Van Rompuy, president of the European Council, to try to draw up a longer-term economic strategy for the European Union to modernize its economy by 2020, an agenda that has been overshadowed by the euro zone debt crisis.

Stocks rose across most of Europe on Wednesday, with the euro-zone benchmark Dow Jones Euro Stoxx 50 index gaining 1.2 percent. The euro slipped as conflicting comments from European leaders showed the bloc was still moving hesitantly toward concrete measures. The 16-nation currency traded at $1.3733 late Wednesday in Europe.

Greek government debt rallied for a second consecutive day, with the yield on the government’s benchmark 10-year bond — which spiked as high as 7.2 percent on Jan. 28 — dropping at one point below 6 percent for the first time in a month. Italian, Irish, Spanish and Portuguese bonds also gained. The cost of insuring government debts against default also fell.

Nicholas Kulish contributed reporting from Berlin.