The Wall Street Journal
Plan to Contain Crisis Likely Means First Euro-Zone Default
By CHARLES FORELLE, PATRICIA KOWSMANN and COSTAS PARIS
BRUSSELS—Euro-zone leaders agreed Thursday on a new €109 billion ($157 billion) bailout for Greece and new steps to prevent its debt crisis from metastasizing across the Continent—in a plan expected to trigger the first debt default by a nation using the common currency.
The meeting also produced a stark and open-ended declaration: The wider euro zone is committed to financing countries that take bailouts—thus far, Greece, Ireland and Portugal—for as along as it takes them to regain access to private lenders.
The move is a bold bid by Europe's leaders to corral an 18-month-old debt crisis that is veering dangerously out of control. Markets stopped lending to Greece, then Ireland, then Portugal. Fearful that policy makers have no concrete strategy for shoring up the larger economies of Spain and Italy, investors have lately soured on them as well. After months of dithering, European leaders resolved that they had to stop the bleeding.
Still, it remains to be seen whether the tourniquet will hold. Even after the new plan, Greece will have a staggering load of debt.
Thursday's agreement was the fruit of several concessions. European Central Bank Jean-Claude Trichet lost a fight to prevent default. German Chancellor Angela Merkel pried open her reluctant nation's pocketbook to write another check and be on the hook for still more.
French President Nicolas Sarkozy, though he lost a bid to tax banks to pay for the bailout, may have come out the best by urging Ms. Merkel to a more proactive approach to the debt crisis.
In a declaration crafted here after hours of haggling, and a whirlwind trip Wednesday to Berlin by the French president, the leaders put forward billions more in new loans to Greece. But they extracted a price: Greece's private-sector creditors will accept a bond exchange that gives them less than originally promised.
The euro zone had long insisted that none of its 17 members could contemplate not repaying its debt, and the European Central Bank vigorously fought a default to the very end. Mr. Trichet joined Ms. Merkel and Mr. Sarkozy at their meeting in Berlin on Wednesday to press his case once more. But Greece was reeling under its huge burden, and its woes were threatening to engulf other countries.
To push back against that contagion, the euro zone also agreed Thursday to a wide expansion of its €440 billion bailout fund. That vehicle, once restricted to lending to countries near the brink of collapse, will now be able to buy euro-zone bonds on secondary markets to move prices and lend directly to countries even before they lose access to private funding. That could even include lending money to finance bank recapitalizations The leaders also agreed to cut the once-lofty interest rates that the bailout fund charges and extend to as much as 30 years the maturities of the loans it provides.
"We created a solid firewall and better fire-brigade equipment," said Herman Van Rompuy, the European Union president.
That creation had been a long time coming. In spring of 2010, when the euro zone was debating the first Greek bailout, the countries—at the firm insistence of Germany—decreed that rescue loans would come only when absolutely needed, and would be issued at punitive rates to discourage countries from slacking on reforms and falling back on cheap aid.
Germany has made a stark reversal. Chancellor Angela Merkel, once the euro zone's "Madame Non," led a push to assemble the new Greek bailout program. In the face of stiff domestic opposition to creating what the German press dubbed a "Transferunion," she opened the door to far greater fiscal aid than her country had once contemplated. In return, she won a commitment that banks and other creditors—and not just taxpayers—would have to bear some of the burden.
The new plan for Greece will work as follows: The euro zone's bailout fund and the International Monetary Fund will lend the country roughly €109 billion over the next three years at around 3.5% interest.
Private creditors who hold Greek debt that matures in the coming years will "voluntarily" turn in their bonds and accept new ones that mature far in the future. The Institute of International Finance, a banking trade group, said its members had committed to participate in the exchange.
The banks, Germany and France's largest institutions among them, offered to take new 30-year or 15-year Greek bonds. The offer includes a menu of four different flavors of bonds with varying coupons and types of insurance—some would be backed by triple-A-rated collateral. Some of the bonds on the menu include a 20% discount to principal.
The euro-zone leaders said the private sector's "contribution" would amount to €37 billion through 2014 and €106 billion through 2019, though it didn't detail the calculation. They also said a debt buyback program would yield an additional €12.6 billion by taking Greek debt off the markets at discount prices.
Charles Dallara, chief executive of the Washington-based IIF, which has been leading negotiations for the private sector, said he believed the deal should put an end "to the uncertainty swirling around the future that was hindering any capacity for the Greek economy to grow."
The nature of the private-sector contribution—and how it is calculated—is murky. But it appears that a relatively small portion of it would come from actually renouncing principal the creditors are owed. A large part will come from accepting to be repaid late at low interest rates.
In any case, the exchange would cause ratings companies to place Greece into "selective default"—a term indicating it has defaulted on some obligations but is honoring others. It isn't clear how long Greece would remain in that situation.
That has a side effect: The European Central Bank has made clear it wouldn't accept defaulted bonds as collateral for its lending operations. That would be devastating to banks—especially Greek banks—that rely on using their holdings of Greek bonds to get quick cash from the ECB. To counteract that, the euro-zone countries committed to providing "credit enhancement"—guarantees or other measures—that would allow the ECB to continue to accept Greek debt.
Mr. Trichet, the ECB president, made clear he was a reluctant participant in the arrangement. But he said governments would provide some €35 billion of insurance in case the Greek collateral isn't solid. He added that the ECB's own holdings of Greek bonds would be "fully and integrally honored."
European leaders took pains to separate Greece from other countries. Greece "requires an exceptional and unique solution," they said in a statement. Other euro countries "solemnly reaffirm their inflexible determination to honor fully" their own sovereign bonds, the statement said.
Ireland and Portugal, both receiving European aid, will get breaks on their interest rates to 3.5%. For Ireland, which was paying around 6% on the EU portion of its €67.5 billion bailout, that is a victory. Previous attempts to lower its interest rate had been stymied by French insistence that Ireland's low corporate tax rate be raised. That demand is dropped.
—Stephen Fidler and Marcus Walker contributed to this article.
Write to Patricia Kowsmann at patricia.kowsmann@dowjones.com, Costas Paris atcostas.paris@dowjones.com and Stephen Fidler at stephen.fidler@wsj.com
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