Europeans Reach Deal on Rescue Plan for Greece

Europeans Reach Deal on Rescue Plan for Greece
By STEPHEN CASTLE and MATTHEW SALTMARSH
Copyright by The New York Times
Published: March 25, 2010
http://www.nytimes.com/2010/03/26/business/global/26drachma.html?hpw


BRUSSELS — After months of fractious debate, the 16 countries that use the euro agreed on a financial safety net for Greece, combining bilateral loans from those European nations with cash from the International Monetary Fund.

The proposal, brokered by France and Germany and then approved by European leaders on Thursday, would take effect if the Greek government were unable to borrow in the commercial markets. Under the deal, loans would be provided at market rates and offered only with the agreement of all the nations that use the euro currency.

“All member states of the euro zone declared that they are prepared to participate,” Herman Van Rompuy, president of the European Council, said at a news conference late Thursday.

President Nicolas Sarkozy of France described the decision as a “success for the countries of the euro zone.”

The accord actually represents a partial retreat for several countries, including France, as well as the European Central Bank, which had initially rejected the idea of the I.M.F.’s taking part in any bailout in the euro zone. Still, the agreement represents a breakthrough because Germany has been resisting pressure to give details on how Greece could be rescued if necessary.

Greece had been desperate for a statement, backed by Germany, that explained how a default would be avoided; it hopes the accord will reduce the high interest rates Athens is being forced to pay as it faces deadlines this year on 54 billion euros ($72 billion) of debt. Greece’s prime minister, George Papandreou, described the deal as “very satisfactory.”

No rescue is imminent, the document said, and the intervention would only be a last resort. Jean-Claude Trichet, president of the European Central Bank, told reporters that “the mechanism decided today will not normally need to be activated.”

José Sócrates, the prime minister of Portugal, confirmed that his country would participate. Portugal faces acute financial difficulties of its own.

The agreement said the euro zone countries would be expected to contribute based on the amount each makes available to the European Central Bank’s capital reserves.

A first draft of the declaration, drawn up by France and Germany, called for the European Council — the body in which leaders from the European Union meet — to become a form of “economic government” for the bloc, and for much tighter controls on member states to avoid any repeat of the Greek crisis. After objections from several countries concerned about the loss of national sovereignty, however, the wording was changed to “economic governance” in the final English version.

No figures were given in the one-and-a-half-page document, though one diplomat, speaking on the condition of anonymity because of the delicacy of the issue, said the total package could reach 22 billion euros.

The deal emerged as the European Central Bank said on Thursday that it would hold off tightening lending rules until 2011, a move that appeared to be intended to help Greek banks in particular. Mr. Trichet told the European Parliament that the central bank would keep the credit ratings at an exceptionally low level for longer than planned on the collateral that its accepts from banks in return for short-term loans.

Previously, the central bank had said that it would raise the threshold for collateral at the end of 2010. It had been lowered as an extraordinary measure to help banks in the euro zone weather the global credit crisis.

The accord on Thursday reflected the determination of Germany, which is the biggest contributor to the European Union, to insist on tough conditions and strong safeguards.

To suit German demands, the accord says that loans to Greece would “not contain any subsidy element” and would be activated only after a rigorous assessment that all other borrowing options had been exhausted.

This would be undertaken by the European Central Bank but would then have to be approved by all 16 nations using the euro. That gives all participating nations, including Germany, a veto.

Germany also won on a demand for a task force to be completed before the end of the year to identify “all options” on how European Union rules could be tightened to prevent any repetition of the Greek crisis, even if such moves meant amending the bloc’s governing treaty.

Chancellor Angela Merkel of Germany has suggested that nations should be excluded from the euro zone if they break the rules, something that would mean a change of the treaty.

Meanwhile, Mr. Trichet’s decision earlier on Thursday lifts another cloud hanging over the Greek government. The prospect of tighter rules was especially worrisome for Greek banks because they hold a lot of Greek government bonds, whose credit ratings have slipped in recent months because of the country’s deficit woes. Further downgrades could eventually mean that the bonds might no longer qualify as collateral for Greek banks seeking low-cost liquidity from the central bank.

Usually, Mr. Trichet would hold back such announcements for news conferences after the meeting of the central bank’s governing council. But with the meeting of European leaders on Thursday night, the central bank may have chosen to send an early signal of support for Greece.

Loredana Federico and Davide Stroppa, economists at UniCredit Research in Milan, called the central bank’s announcement “quite a U-turn.”

Until now, the central bank had been taking incremental steps to remove the generous liquidity measures it put into effect at the start of the global financial crisis.

The bank’s decision should have “positive implications” not only for Greece, they said, but also for other countries under pressure along Europe’s periphery, like Portugal, which was downgraded on Wednesday by Fitch Ratings.

More details of the changes will be announced at the central bank’s next council meeting on April 8. Greece’s long-term foreign currency rating is A2 from Moody’s and BBB+ from Standard & Poor’s. For its operations, the European Central Bank had until now said that the current minimum credit threshold of BBB- would revert to A- at the end of 2010.

Now, for Greek government bonds to be excluded from European Central Bank operations, they would have to be downgraded five times by Moody’s and three times by Fitch and S.& P., analysts said.

“No doubt the worries about Greek government bonds remaining eligible at the E.C.B. beyond the end of 2010 have played a role in accelerating the decision to modify the framework, which in itself is not surprising,” Laurent Fransolet, an analyst at Barclays Capital in London, wrote in a note to clients.

Stephen Castle reported from Brussels and Matthew Saltmarsh from Paris.