http://www.nytimes.com/2011/07/22/business/global/European-Union-Summit-Meeting-on-Greek-Debt.html?hp
Euro Zone Leaders Clinch Rescue Plan for Greece
By STEPHEN CASTLE
Published: July 21, 2011in
BRUSSELS — After weeks of uncertainty that revived fears about the
foundations of the euro, European leaders on Thursday clinched a new
rescue plan for Greece that could push the country into default on
some of its debt for a short period but would give Europe’s bailout
fund sweeping new powers to shore up struggling economies.
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Vassilis Filis/European Pressphoto Agency
Chancellor Angela Merkel of Germany meeting with Prime Minister George
Papandreou of Greece.
At a press conference late Thursday, German Chancellor Angela Merkel
confirmed the 109-billion-euro aid package for Greece. European
officials also said that financial institutions that own Greek bonds
would contribute 50 billion euros through 2014 through a combination
of debt extensions and the purchasing of discounted Greek bonds on the
secondary market.
The outlines of the plan worked out by the 17 euro zone heads of
government seemed particularly bold, dealing with the economic
problems of bailed-out Ireland and Portugal as well as Greece, and
calling for nothing short of a “European Marshall Plan” to get Greece
itself on a road to recovery. The underlying economies of those
countries — and others — remain remarkably frail, however.
On the central issue of extending debt, rating agencies had already
issued strong warnings that such steps might constitute a limited form
of default because creditors would not be repaid in full on the
original terms.
The agreement came after days of conflict among Europe’s leaders over
how to keep the debt crisis from engulfing the much-larger economies
of Italy and Spain. Any contagion would not only pose a potent threat
to the euro — the most important symbol of the European integration —
but could destabilize the entire global financial system.
The plan calls for a “comprehensive strategy for growth and investment
in Greece,” including the release of European Union development funds
to finance infrastructure projects.
More significant, the euro zone leaders gave wide-ranging new powers
to the bailout fund, the European Financial Stability Facility, by
allowing it to buy government bonds on the secondary market and to
help recapitalize banks where necessary.
That would effectively turn it into a prototype European version of
the International Monetary Fund. The bailout fund would even be able
to help shore up countries that had not requested a rescue.
Germany rejected such ideas only months ago.
Strengthening the bailout fund signals a new willingness to come to
terms with the scale of the euro zone’s debt crisis by taking a big
step toward common economic structures. The challenges for Greece and
the other bailed-out countries remain enormous, however, and some fear
a default may still happen, even though markets reacted positively
Thursday.
Diplomats said that going forward with the proposals would require a
change in the fund’s rules, which in turn would require approval by
national parliaments.
On the eve of the summit meeting, a statement from the French
president, Nicolas Sarkozy, and Mrs. Merkel said they had “listened”
to the views of the president of the European Central Bank, Jean-
Claude Trichet, who flew in from Frankfurt unexpectedly to join them
in Berlin.
Though the statement from Mr. Sarkozy and Mrs. Merkel did not say
whether they had settled the issue of allowing Greece to write down
some of its debt — something Mr. Trichet has argued against publicly
and adamantly — suggestions before the summit meeting in Brussels were
that the E.C.B. had softened its stance.
“The demand to prevent a selective default has been removed,” the
Dutch finance minister, Jan Kees de Jager, told Parliament in The
Hague, Reuters reported.
That also appeared to be the sense of a draft meeting statement that
circulated before the summit meeting ended.
“The financial sector has indicated its willingness to support Greece
on a voluntary basis through a menu of options (bond exchange,
rollover and buyback) at lending conditions comparable to public
support with credit enhancement,” the draft document said.
Though no figures were specified in the draft agreement, the loss for
private investors would be around 20 percent, according to a German
official not authorized to speak publicly.
“Selective default” is used by rating agencies to describe when terms
of a bond such as the repayment deadline or interest rate have been
altered. It falls short of an outright default, which usually occurs
when the borrower stops making payments.
One theory is that the rating agencies could be persuaded to wait
before issuing any formal ruling on the plan.
But the draft statement offered a series of concessions for Greece
under a new bailout, concessions designed “through lower interest
rates and extended maturities, to decisively improve the debt
sustainability and refinancing profile of Greece.”
According to the draft, the maturity of European loans to Greece would
be extended to a minimum of 15 years from 7.5 years and at interest
rates of around 3.5 percent.
Similar help through reduced borrowing costs would be extended to
Portugal and Ireland. The Irish government would, in exchange, end a
dispute with France by promising to “participate constructively” in
talks on a common base for corporate tax in Europe. Officials said
that means Ireland would not be required to raise its relatively low
corporate tax rate — currently 12.5 percent — as had been sought by
some countries, including France, which have higher tax rates.
The summit meeting was called after days of market turbulence in which
borrowing costs spiked for Italy and Spain, raising fears that the
euro zone debt crisis would spread to those much bigger countries,
potentially setting off another global financial crisis. Germany,
Finland and the Netherlands have insisted that private bondholders
share the pain of a second bailout, putting them at odds with the
E.C.B. and some other governments. Besides concerns over contagion,
the central bank has said a selective default would make it impossible
for it to accept Greek bonds as collateral.
James Kanter contributed reporting from Brussels. Matthew Saltmarsh
and Landon Thomas Jr. contributed from London._______________________________________________
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