Un po di pessimismo
Greek aid deal unlikely to end euro zone jitters
(Reuters) - Europe's deal on a financial safety net for Greece is likely to reduce but stop well short of ending investors' jitters over high debt levels in the euro zone and its difficulties in coordinating economic policy.
The leaders of Germany and France agreed on Thursday on a joint plan with the International Monetary Fund to extend aid to Greece if needed, the French president's office said. A Greek government spokesman subsequently said all 16 euro zone countries had agreed on the package.
The unprecedented deal, which a senior European Commission source said would be worth 20-22 billion euros ($27-29 billion), appears for the foreseeable future to remove the possibility of investors' worst-case scenario: a debt default by Greece.
But because of tough conditions attached to the package, Greece will probably not be able to access that money any time soon, and will have to continue borrowing at expensive rates as it struggles to repair its finances amid a deep recession.
This prospect could prevent any extended recovery by the euro, which has sunk to 10-month lows against the dollar, or by the asset prices of Greece and other weak nations on the periphery of the euro zone, such as Portugal and Spain.
GREECE TO KEEP STRUGGLING
With German public opinion strongly against giving money to Greece, Berlin insisted the aid mechanism would only be triggered "if there were very serious difficulties and there was no other solution," in the words of a French official.
A German official said euro zone states would have to agree to activate the plan, giving Berlin a veto; officials in Berlin have repeatedly said Athens must take responsibility for the fiscal indiscipline that led to its debt crisis.
So Germany appears willing to see Greece, and other heavily indebted euro zone members, endure years of economic pain.
For Greece, the pain will be great. It has stayed in recession even as many countries have started recovering, and it has agreed under pressure from the European Union to introduce drastic public spending cuts and other austerity steps.
By damaging tax revenues, the austerity could make further cutbacks necessary for Greece to hit its budget deficit targets, threatening a vicious circle and keeping debt markets nervous about the country despite the safety net.
The IMF, with its long experience of shepherding countries through debt crises, will provide technical advice to Greece in addition to offering money, which may reassure some investors.
But the involvement of the IMF may prove a two-edged sword as many of the countries which go to the institution have ended up restructuring their debt. Greek bond prices could suffer if investors start to speculate about a Greek restructuring.
For these reasons, the announcement of the safety net may not bring Greek bond spreads down close to pre-crisis levels, and Athens may continue for many months to issue debt at high interest rates -- adding to its fiscal burden.
In anticipation of the announcement, made after the debt market closed, the spread of the 10-year Greek government bond yield over German Bunds fell to 313 basis points on Thursday from 323 bps a day earlier.
It is well down from a record 405 bps hit in January, but remains far above levels below 100 bps enjoyed by stronger euro zone states. Some traders think it could drop further to around 250 bps in coming days, depending on the disclosure of details of the safety net, but not much further.
EURO ZONE
The safety net also seems unlikely to remove markets' concern over the ability of euro zone governments to cooperate in the interest of the zone.
This concern was evident in the euro's weak response to the announcement of the safety net; the currency rose only briefly and then slid to a 10-month low of $1.3265 from around $1.3340.
The agreement was preceded by weeks of public bickering as Germany and Greece traded accusations of irresponsibility. Senior officials of governments and the European Central Bank disagreed on issues such as whether the IMF should be involved and whether there should be an option for countries to be ejected from the zone.
Although an agreement was eventually reached, the difficulty in doing so cast doubt on how well governments would cooperate in implementing the aid scheme if that became necessary.
And for some investors, the spectacle of the euro zone turning to the IMF for assistance is an ominous indication of the zone's inability to solve its own economic problems.
By refusing to provide Greece with aid on easy terms, and by insisting that the European Union strengthen its supervision of members' fiscal policies, Germany has signaled the euro zone will not reward lax fiscal policies by its members.
This may resolve the problem of "moral hazard" for the zone, setting the stage for a recovery of investor confidence in the euro over the long term.
But the safety net leaves unresolved another big issue: diverging economic performances between export powerhouses such as Germany and weaker countries such as Greece.
These divergences, which may increase further when the ECB eventually tightens monetary policy, make it difficult for the weak countries to preserve fiscal discipline while enduring the zone's monetary straightjacket.
Senior officials of the EU, the ECB and national governments have talked vaguely of increasing policy coordination to reduce these differences, but they have not come up with coherent, detailed plans to do so.
