Europe Approves Bailout Plan For Greece, Other Nations
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 also give Europe’s bailout fund sweeping new powers to shore up struggling economies.
At a press conference late Thursday, German Chancellor Angela Merkel confirmed the 109-billion-euro aid package for Greece. According to drafts of a statement that was being discussed earlier in the evening by the 17 euro zone heads of government, banks have agreed to take part in several programs to reduce Greece’s debt, including plans that would mean exchanging existing bonds for new bonds with lower interest rates and longer maturities.
The outlines of the plan 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, and the plan itself had many hurdles to overcome.
On the central issue of extending debt, rating agencies have 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 negotiations 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.
According to the draft declaration, euro zone leaders were set to agree on a remarkable shift of direction. A series of measures to lighten the burden on Greece, Ireland and Portugal represents a recognition that the mountain of debt hanging over them threatens to stifle any prospect of recovery.
The draft 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 were also being asked to give 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. Under the draft proposals, 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 would signal 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 the German chancellor, Angela 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 appeared to be the sense of the draft summit meeting statement, which opened the way to a variety of different measures.
“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 a term used by rating agencies when such terms of a bond 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.
Officials suggested that an earlier proposal for a tax on banks had been dropped. This was once seen as a tool for raising private sector financing without provoking a default. But the concept posed technical problems, since the tax would have to be levied by each national government and would exclude countries that did not use the euro even if they had exposure to Greek debt.
Asked about the bank tax idea, Jean-Claude Juncker, the prime minister of Luxembourg and head of the Eurogroup, which is made up of euro zone finance ministers, said, “I don’t think that there will be an agreement on that.”