Europe Boosts Bailout Fund With `Firewall' Bond Purchases, Eases Greek Aid
By Alan Crawford and Simon Kennedy - Mar 12, 2011 2:33 PM GMT+0100 Sat Mar 12 13:33:42 GMT 2011
European leaders widened the scope of the euro’s rescue fund, authorized it to buy
government bonds and eased the terms of Greek bailout loans as they unexpectedly pushed through fresh measures to end the bloc’s debt crisis.
Under a pact struck at 1:30 a.m. in Brussels after eight hours of talks, the bailout facility will now be able to spend its full 440 billion-euro capacity ($611 billion) and to buy bonds directly from governments. In a blow to European Central Bank President
Jean-Claude Trichet, it won’t be allowed to purchase debt in the open market or to finance debt buybacks.
The agreement is part of a push by governments to draw a line under the crisis, which has raged for more than a year despite a series of remedies by European governments. Investors had expected a deal to be delayed until a March 24-25 summit, with the yields on Greek and Portuguese bonds this week rising to euro-era records on concern officials would again fall short.
“
I’m positively surprised, for a change,” said Andrew Bosomworth, a money manager at Pacific Investment Management Co. in Munich and former ECB economist. “The agreement contains important elements of a firewall” that could stop the crisis worsening.
Allowing the fund buy bonds in the primary market would help other indebted nations by acting as a backstop should a Greek restructuring spook markets and threaten to derail government bond auctions, he said.
Morning Accord
While Greece was told it would have the cost of its loans pared and the repayment period extended, officials rejected Ireland’s bid for relief as recently elected Prime Minister
Enda Kenny refused to yield to calls to raise its 12.5 percent company tax rate.
The accord came at the end of a session that began after 5 p.m. following daylong talks among the 27 European Union heads on the Libyan crisis. German and French officials this week said they didn’t expect a comprehensive pact until the end of month even as the debt ratings of Greece and Spain were cut and the euro posted its biggest weekly drop since the start of 2011.
“This is an important message on the political pledge of the euro members to fight for the euro’s stability,” German
Chancellor Angela Merkel told reporters. “Everyone had to make a contribution. I hope that this will also be a good message to the world in terms of the euro as a major currency.”
An initial deal last night on a plan to tighten economic cooperation and boost competitiveness committed nations to enact budget rules into law, a core German demand, and paved the way for the final agreement by the end of the month.
Merkel Politics
By reaching an agreement now, Merkel avoided having to deal with it in the run up to a March 27 regional election in Baden Wurttemberg as her voters complain about having to bailout other countries.
In return for acceptance of her conditions on controlling debt, Merkel swung Europe’s biggest economy behind plans to allow greater flexibility and firepower in the EU rescue fund, the European Financial Stability Facility.
“This should go down well with the markets for now and lead to an easing of the euro-zone’s sovereign debt crisis in the near term at least,” said Howard Archer, chief European economist at IHS Global Insight in London. “The leaders will hope this is taken as evidence of their determination to do whatever is necessary to hold the eurozone together.”
The EFSF had been limited to spending about 250 billion euros due to reserves it had to hold for its AAA rating. The commitment wasn’t matched with detail as Merkel indicated states will increase their guarantees.
Trichet Tone
The provision to allow primary-market bond purchases will offer a lifeline to aid recipients in return for austerity commitments. A basic accord was also reached on the permanent safety net from 2013, the European Stability Mechanism, with a mix of guarantees and capital, she said.
Trichet resisted giving the deal a full-blown endorsement, saying it “goes in the right direction.” That signals disappointment in the refusal of governments to let the rescue facility buy bonds in the open market and take pressure off the ECB, which has bought 77 billion euros of assets in the past year.
Adding urgency to the talks, the leaders met amid speculation that
Greece would be forced to restructure its debt and
Portugal would soon be the third euro nation to need help.
Greek 10-year yields rose 6 basis points yesterday to 12.81 percent and similar-maturity Irish yields jumped 14 basis points to 9.65 percent. Greek securities plunged this week after Moody’s Investors Service cut the nation’s rating, already at junk, by another three levels, saying the probability of default had increased. Credit-default swaps on Greek government debt rose 8 basis points to a record 1,048 basis points.
Lower Greek Rates
Leaders made a provisional agreement to lower Greece’s interest rates of about 5 percent for aid by 100 basis points, and extend the repayment period of the loans to 7 1/2 years from three years.
Greek Prime Minister
George Papandreou said the moves would save about 6 billion euros over the life of the loans.
“
Greece has made major efforts, just look at the size of their privatization program,” French President Nicolas Sarkozy said. “We’re not asking Ireland to put up their corporate taxes to the European average, but to make some effort.”
With two weeks to the summit endgame, Merkel and Sarkozy clashed with Kenny over corporate taxes. They had insisted on a common corporate tax base as the condition for agreeing to ease the terms of Ireland’s 85 billion-euro bailout. Kenny rejected that position, calling it “harmonization of taxes through the back door.”
Irish Opposition
Ireland’s main corporate tax rate is 12.5 percent, compared with an EU average of about 23 percent and even higher rates in Germany and France, which it has used to lure companies such as Hewlett-Packard Co.
The European Commission, the EU’s executive body, will present a proposal on a common corporate tax base in the coming weeks, the agency said. Ireland will think it over and come back to the rest of the EU within two weeks, Merkel said.
Talks on a deal for Ireland “will be difficult and detailed but I am convinced and remain convinced that there will be that we can find a way forward,” Kenny said.
With the debt crisis lapping at Portugal’s shores, Prime Minister
Jose Socrates’s government yesterday announced new commitments on deficit reduction amounting to 0.8 percent of gross domestic product for this year.
The yield on Portugal’s five-year debt surged to a euro-era record of 8 percent on speculation that would soon be forced to seek a bailout. Portugal’s 10-year bond yields reached 7.70 percent on March 9, the highest since at least 1997.
Questions have also been raised about
Spain, which was cut to Aa2 by Moody’s Investors Service on March 10 on concern about the cost of shoring up its banking system. Spain’s 10-year government bond yield was at 5.4 percent yesterday.
Trichet said the “credibility” of the
Portuguese government “seems to me considerably re-enforced by these measures, which are of substance. When you go through all the measures, you see they are very substantial.”
(Bloomberg)
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