BRUSSELS, Belgium — It was billed as a make-or-break summit for the euro and European leaders who emerged from the talks on Thursday night were clearly relieved they had cobbled together a package to tackle the debt crisis in Greece and prevent it from spreading across Europe.
“That is really a game changing decision,” Christine Lagarde, director of the International Monetary Fund (IMF), told reporters after the meeting of euro-zone leaders. “They were all together driven by the desire to keep it together and to make sure they had to tools to actually resist [pressure on the euro]. That was bit of a first.”
Markets also responded positively as the leaders’ 16-point plan exceeded expectations with an extra 109 billion euro ($156 billion) lifeline for Greece. The euro rose against the dollar and shares rallied in European markets on Friday morning with banks leading the charge. There were significant falls on the interest rates that embattled southern European nations have to pay on their government bonds.
“The euro-zone states have shown that they are able to meet the challenge and are able to act,” German Chancellor Angela Merkel said after the eight-hour summit. “We have made a significant step today toward achieving our goals.”
Considering the European leaders’ record of dithering during the 18 months of the euro crisis it was a good day’s work, but nobody should have any illusions that the crisis is over.
The first test will come within the coming hours and days when rating agencies assess whether the multi-billion-euro “haircut” on Greek loans which private banks agreed to as part of the deal constitutes a default — a decision that could bring renewed market agitation, especially since many believe the banks will have to sustain still more losses before Greece begins to recover. No Western European nation has defaulted since World War II.
The key points of the deal hammered out by the 17 euro-zone leaders include:
- an extra 109 billion euros in loans from the EU and IMF in addition to the 110-billion-euro rescue loans launched in May 2010;
- terms of the loans will be relaxed, Greece will be given at least 15 instead of seven years to pay them back and interest rates will be cut to 3.5 percent from the up-to-5.8 percent demanded previously;
- the private sector will make an additional contribution of 50 billion euros by a series of swaps and buy backs that will effectively lower interest rates and give Greece more time to pay back;
- the EU’s Financial Stability Facility set up last year as a 440-billion-euro emergency fund for supporting debt-ridden nations is given more powers and more flexibility to intervene on the markets — French President Nicolas Sarkozy called it the start of a European Monetary Fund;
- a new aid program, which EU officials are comparing to the Marshall Plan, will be prepared to jump-start the Greek economy;
- France and Germany are preparing plans to improve economic management of the euro zone with tighter rules and more policy coordination to prevent repeats of the crisis. Sarkozy said he hopes the rules will be adopted in October.
After months of fractious indecision, the deal saw a rare degree of compromise and decisiveness from Europe’s leaders, but it leaves a number of questions unanswered, notably whether the package will be enough to enable Greece to get its economy up and running again while paying off a debt which has risen to 150 percent of its GDP. The deal is estimated to cut just 12 percent off the 350-billion-euro total debt.
Will markets trust Europe’s leaders when they insist the Greece case is an exception? The deal raises the question of whether private banks will have to take on mores losses on their loans to Ireland, Portugal or other struggling euro-zone members. The assertion by the EU’s summit chairman Herman Van Rompuy that the leaders had taken a major step to stop contagion — “clearly that the Greek situation is different from that of other countries” — did not sound convincing.
The EU’s emergency fund has been given more powers to intervene to prevent contagion, but there was no talk of increasing its size from 440 billion euros, which would not be enough to come to the rescue should the crisis spread to Spain or Italy.
Markets were relieved that the agreement by the Institute of International Finance, which represents 400 of the world’s banks and financial institutions, to voluntarily help Greece with a 21 percent loss on private debt holdings meant that the European leaders dropped a threat to impose compulsory taxes on the private sector. But the next few days could be crucial as the markets delve into the minutiae of the deal.
“More than expected but not enough to make us sleep comfortably,” was how economists Frank Engels, Antonio Garcia Pascual and Laurent Fransolet of Barclays Capital described the agreement. “The extraordinary EU summit surprised slightly on the upside in that euro area governments presented plans that aim to tackle Greece's debt overhang … the official statement lacks detail in key areas, such as private sector involvement for Greece.”