Brussels, 22/07/2011 (Agence Europe) - Greece will be an exception in the eurozone, as its bailout will be the only one to involve the private sector. That is the commitment made by euro area leaders, meeting in Brussels on Thursday 21 July in an extraordinary Summit attended by ECB President Jean-Claude Trichet and IMF Director General Christine Lagarde. The 17 eurozone states thrashed out the details of the second Greek plan and, if this leads to a partial default by Greece, the safeguards will be in place to deal with the fall-out. They decided to ease the loan conditions on the three countries that have received financial support. To prevent the risk of contagion and the debt crisis spreading to other euro area countries, the rescue fund, the EFSF, will be beefed up.
“We had to act quickly” to avoid a problem resulting “from a series of national debt crises” becoming “systemic”, and threatening the stability of the eurozone, said European Council President Herman Van Rompuy. He spoke of three important decisions taken by the heads of state and government: measures to improve “the Greek debt sustainability”, intended to “stop the risk of contagion” and to improve “the eurozone's crisis management”. These decisions were modelled on the principles agreed the previous night by German Chancellor Angela Merkel and French President Nicolas Sarkozy, joined by ECB President Jean-Claude Trichet. Greek Prime Minister George Papandreou said the measures would ease the “burden” to be borne by Greek citizens. “We are a creative, hard-working people. We are calling for the right to carry out profound changes in our country”, he added. In an attempt to help persuade the Greek people of what is required, he agreed to hold a meeting of the Eurogroup in Greece after summer.
The Greek patient. Greece requires “an exceptional and unique solution”, according to the Eurozone leaders. Welcoming the €28 billion austerity package that the Greek government adopted at the end of June, which will require “unprecedented but necessary” efforts from the Greek people, they promised a €109 billion second rescue plan financed by institutional creditors (EU, IMF) between 2011 and 2014. The plan will involve the EFSF but not the Community Financial Stability Mechanism, which is being used in the cases of Ireland and Portugal. The EFSF loans will be at a reduced rate (from the current 4.5% to something close to 3.5%) and extended maturity. Maturity, currently seven and a half years, will rise to a minimum of 15 years and possibly up to 30 years, with a 10-year period of grace. Encouragements to implement this programme will be brought in but reference to “collateral arrangements”, so dear to Finland, was ultimately removed.
Private sector involvement. The private sector (banks, insurance companies, investment funds) will contribute to the second Greek programme, the heads of a number of major European banks, also present at the extraordinary Summit, assured. The European leaders were pleased that the private sector was ready to make a “voluntary” contribution “through a range of options”. The banks will buy back debt, will extend the term of the Greek debt due to mature by 2014 or will reinvest, in long-term (30-year?) securities, a part of their sovereign bonds when they mature. The French suggestion that banks be taxed was rejected. The 174 eurozone countries estimate their net contribution over the 2011-2014 period to be €37 billion. To this will be added a €12.6 billion debt buy-back programme. In all, for the period from 2011 to 2019, the private sector involvement could reach €106 billion.
“We are crystal clear that private sector involvement is for Greece, and Greece alone. It is an exceptional solution which we exclude for others”, stated European Commission President José Manuel Durão Barroso.
It is difficult to say at this point if this à la carte menu carries with it the risk of a partial default by Greece, as the rating agencies warned. German Chancellor Angela Merkel left it for the rating agencies to evaluate the decisions taken. French President Nicolas Sarkozy refused to use “these words”. European Central Bank President Jean-Claude Trichet refused to forecast whether the decisions taken would lead to a situation with unpredictable consequences for the European financial sector. “At the present moment, to my knowledge, no such decision has been taken”, he said. “I don't think that the experts who have looked at this issue consider that what was decided (on Thursday) will bring about a 'credit event'”, he added. The ECB, which won the day on the voluntary involvement of the private sector, still hopes that partial default and a “credit event” will be avoided. Whatever happens, member states pledged to provide adequate resources to recapitalise banks if needs be (€20 billion) and to support refinancing operations (€35 billion), Trichet said. In the event of partial default by Athens, Greek banks, which use Greek bonds to guarantee loans contracted with the ECB, will need financial support to continue this kind of operation.
In the wake of the European Commission initiative, a mini “Marshall Plan” will help Greece to more rapidly expend the €20 billion earmarked for it from structural funds. “Heads of state and government have welcomed the Commission's decision to create a task force for Greece to provide technical assistance to help Greece implement its reforms and mobilise and better target structural funds”, Barroso was pleased to state.
Preventing risk of contagion. The recent upheavals on the Spanish and Italian debt markets have convinced eurozone leaders to take measures to combat the risk of contagion. “We have decided to create the beginnings of a European Monetary Fund”, Sarkozy said. The EFSF will be able to intervene on secondary markets in order to directly buy up sovereign debt securities held by investors. Such intervention should be approved further to an ECB analysis and decided by unanimity of the 17 eurozone members. Money could even be lent from the European rescue pot to countries that are not the subject of an adjustment programme in order to recapitalise defaulting financial institutions. This new competence could, for example, help Cyprus that has plummeted into political and economic crisis further to the damage done to its main electricity generating power plant.
The 17 eurozone countries welcomed the progress made in implementing the Irish and Portuguese programmes. Dublin and Lisbon will enjoy the same loan terms and conditions as those afforded to Greece. While previously making the reduction of Irish interest rates subject to a rise in the corporate tax rate in force in Ireland, France is now content with Ireland's commitment to make a “constructive” contribution to discussions on fiscal harmonisation at European level, especially with regard to corporate tax. The reduction of the Irish tax would be by way of 2%, Prime Minister Enda Kenny was pleased to note, amounting to savings of €600-800 million. “No conditions have been placed on this interest rate reduction”, he said with delight.
Economic governance. The eurozone countries reiterated their commitment to consolidate their public finances, the aim for all those in a situation of excessive deficit being to come back below the 3% of national GDP mark “by 2013 at the latest”. They welcomed, moreover, the recent adoption of the Italian draft finance law providing for this objective to be reached a year earlier and for balance to be achieved in 2014. Pledging to implement the economic policy recommendations adopted, they called for a “rapid” conclusion to the negotiations on reform of the Stability and Growth Pact, underlining: “Eurozone countries will fully support the Polish Presidency to reach an agreement with the European Parliament on voting rules within the framework of the Pact's preventive chapter”. Jean-Claude Juncker, Luxembourg Prime Minister, said he wanted the French to “give up their negative approach to the final European Parliament proposal”.
Finally, European leaders called on Herman Van Rompuy to make concrete proposals on crisis management by October. Hoping to “seize the opportunity provided by the Greek crisis to make a qualitative leap in eurozone governance”, Sarkozy promised, with Angela Merkel, to table proposals for strengthening economic governance by energising the Eurogroup itself. Even the question of a European financial rating agency should be tackled, he said.
Sarkozy: Proposals soon on strengthening euro zone governance
“We have decided to set up the beginnings of a European Monetary Fund”, said French President Nicolas Sarkozy. The European mechanism put in place a few months ago will be made stronger and have greater flexibility. “The EFSF will be able to intervene preventatively to support a state experiencing transitory difficulty. It will be able to help a country recapitalise its banking sector if necessary. And it will be able to intervene on the secondary market when the ECB says the market is in default”, Sarkozy said.
The measures taken will reduce Greek debt by 12 GDP points (the debt current stands at 160% of GDP), the French president said. The rate reduction agreed represents savings of €30 billion for Greece. Greece's creditor banks are going to have to provide €135 billion more in aid over 30 years. “What we are doing for Greece, in terms of debt sustainability, will not be done for any other member state of the euro area”, Sarkozy stated. “In this business of sustainability, it's all about contagion”, he added. “We are going mightily to help Greece get back on the road to growth by means of a policy of allocation of structural funding to help Greek competitiveness”.
On the future of the euro area, France and Germany took the view that “ambitious and proactive” progress had to be made on economic governance in the next few weeks. Angela Merkel and Nicolas Sarkozy will, then, bring forward proposals by the end of summer and European Council President Herman Van Rompuy will make proposals on governance in October. “Who heads the Eurogroup, Eurogroup resources, setting up a European rating agency - these are issues on which France and Germany will bring forward proposals”, Sarkozy said. “We plan to make use of the Greek crisis to make a qualitative leap in governance of the euro area”, he added.
When asked about a possible partial payment default by Greece, Sarkozy said: “Those are not the words I used. I'm not the head of a rating agency. The problem is how Greece can repay its debt. For that, we've decided to increase the length of the loans, thus making life a little easier, and we have decided to significantly reduce interest rates. And the private sector will help in this by volunteering to take part in this extension of maturity and lowering of rates. Greece will pay its debt. If there are reactions from rating agencies, countries will draw the conclusions, in terms of guarantees from private banks which will provide new loans to Greece and ECB guarantees which will continue to intervene”.
Merkel: the euro is expression of great solidarity
In substance, German Chancellor Angela Merkel said the agreement reached provides a guarantee of greater security for the single currency as well as greater prosperity for Europe. The euro is not just a currency, she added, saying it is also the expression of “great solidarity in Europe”. The eurozone has shown it is able to act. On the subject of the Greek bailout plan, “we need a voluntary contribution from the private sector and we have highlighted the need to maintain eurozone stability. Additional instruments are necessary to avoid contagion”.
Merkel went on to add when speaking of eurozone governance: “We are clearly of the opinion, as recently demonstrated, that there must be even better coordination of our economic and financial policy”. “Germany and France have decided to present bilateral proposals end August, early September” in this respect, she said. Regarding the improvements to the European Financial Stability Facility (EFSF), that Nicolas Sarkozy compares to the beginnings of a European Monetary Fund, Merkel said: “With the permanent mechanism, we have an institution that is able to take long-term action, even if there are differences between the eurozone and the International Monetary Fund. For example, the latter cannot act on the secondary market”, on which debt securities are bought and sold, she said.
Berlusconi: A European state cannot go bankrupt
Silvio Berlusconi, President of the Italian Council of Ministers, first of all sought to be reassuring about Italy's situation, pointing out that the austerity plan decided by the government had been appreciated by the other governments.
He said that, on the Italian side, they had worked well and that the eurozone was economically sound. The countries of the eurozone have set national interests to one side based on the fundamental principle that European states cannot go bankrupt, he continued, pointing out that a solution between European institutions, the IMF and private institutions had been found for sustainable financing of the Greek debt. The participation of private banks - which was the most difficult point to resolve - will be on a voluntary basis and subject to the same conditions under which European institutions operate, he said. The president of the Italian Council categorically denied rumours that private institutions should have participated by receiving less back than what they had invested in public debt securities, as was the case for securities in Argentina. He said: “This is just not true: integral pay back will be guaranteed by the EU and by all the other countries of the eurozone”, he added. On the subject of the amount of Greece's total bailout, Berlusconi gave a personal estimate amounting to €109 billion provided by the European Financial Stability Facility (EFSF), €37 billion provided on a voluntary basis by private institutions, plus €12 billion from other sources for an overall amount of €160 billion. And still on the subject of Greece, Berlusconi announced the creation of a task force that will work with Athens for better use of European funds and for improving Greek competitiveness. Furthermore - for the benefit first and foremost of Greek citizens and government that are finding the austerity pill hard to swallow - Italy has called for a Eurogroup meeting to be organised in Greece, something that “Mr Papandreou has undertaken to organise after the summer”.
A second decision concerns the EFSF, called upon to become “more flexible” and to have an extended role. “It may also intervene on the secondary market and may participate in recapitalisation of financial institutions through direct loans to governments”, Berlusconi said.
Finally, the Commission received a mandate to develop a proposal so that the European financial markets are more independent of the privately held international rating agencies. When asked whether he spoke of the Italian situation, Berlusconi answered: “no, because we are the 3rd European economy, the 2nd manufacturing economy, we have a very sound banking system, 85% of families are property owners, we have an active balance of payments, we have a retirement system linked to the average age rise and we hold over 60% of our public debt. In short, our public debt - 120% of GDP - is high, but Italian citizens live well”.
Ireland satisfied with eurozone debt deal
Irish Prime Minister Enda Kenny expressed satisfaction on Thursday 21 July after the extraordinary eurozone summit, saying that his country had secured a lower interest rate on its debt and more flexibility to confront the crisis. "The conclusions of this meeting are good for our people, and good for our country", he told reporters. He said that the European Financial Stability Facility would now be more flexible, as Dublin wants. And he said that interest on Ireland's debt payments would be reduced "in the order of two percent", which would amount to some € 600-800 million per year. "There are no conditions attached to the interest rate reduction", he underlined. But Kenny warned that the agreement does not make Ireland's economic challenges any easier, and that a very tough budget still lies ahead.
Zapatero happy with outcome of Summit
José Luis Zapatero was pleased with the outcome of the meeting of eurozone leaders. The objective had been to re-instil confidence in the markets and, according to the Spanish prime minister, the objective had been fully achieved. “This was our fourth meeting. Each has been important but this one was decisive. The uncertainty had reached very high levels and a strong response was called for, to inject confidence”. The response found was “immediately welcomed by the markets”, he stated.
In early afternoon, publication of the draft agreement among the leaders of the euro area had given a shot in the arm to stock exchanges: at 5.00pm, Madrid had risen by 3.2%, Milan by 4% and Paris and Amsterdam by 2%.
Zapatero presented the Greek bailout plan, and welcomed the decisions on the changes to the EFSF, saying: “The option of intervention on the secondary market is a relief. We have no intention of asking for such aid, but it was very positive for the stability of the euro zone.” Zapatero intends to bring just such stability to Spain with a programme of structural reform respecting the promises of the government and the autonomous communities on deficit reduction. The Spanish prime minister returns to Madrid with a blank cheque from the other euro area leaders who have welcomed the fiscal and financial measures he has undertaken. Zapatero has been given further backing at a crucial time for Spain: as he was taking part in the Eurogroup meeting, the Spanish government was approving a major social security reform. (M.B./G.Ba/L.C./E.H./F.G./Loc)
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