European governments moved toward a confrontation over a second rescue package for Greece, just as a dimming fiscal outlook inPortugal opened a new front in the debt crisis.
Euro leaders left a Brussels summit late yesterday with no accord over how to plug Greece’s widening budget hole and German Chancellor Angela Merkel voicing frustration with the Athens government’s failure to carry out an economic makeover.
“Greece’s debt sustainability is especially bad,” Merkel told reporters. “You have to find a way through more action by the Greek government, more contributions by private creditors, for example, in order to close this gap.”
Bargaining with Greece over a debt writedown and its economic management overshadowed efforts to point the way out of the financial crisis. EU chiefs agreed to speed the setup of a full-time 500 billion-euro ($659 billion) rescue fund and signed off on a German-inspired deficit-control treaty.
The summit was the 16th in the two years since the Greek debt emergency provoked a Europe-wide drama, leading to unprecedented aid packages for Greece, Ireland and Portugal and shattering European faith that the common currency was indestructible.
After the gathering of European leaders, EU President Herman Van Rompuy convened a smaller group, including Greek Prime MinisterLucas Papademos and European Central Bank Executive Board member Joerg Asmussen, to weigh the next steps on Greece.
‘On Track’
Van Rompuy spoke of the need “to put the current program back on track” and said finance ministers will try to hammer out the follow-up plan — in the works since July — by the end of the week. Greece is counting on aid to meet a 14.5 billion- euro bond payment on March 20 to escape default.
Merkel’s comments indicated that governments are loath to boost an October offer of 130 billion euros of loans in a second package, forcing investors to absorb net-present-value losses on Greek bonds that go beyond the 69 percent now on the table.
Speaking to reporters at 1:30 a.m. today, Papademos said “some difficulties” beset the debt-swap talks and hinted that donor governments may have to put up more money.
“The timeline is tight, but we are absolutely focused on the target of bringing the negotiations to a successful conclusion by the end of the week,” Papademos said.
Greek Feuds
In turn, Greece’s feuding political parties face pressure to deliver more savings and to verify in writing that the austerity program will be carried out, no matter who wins elections to replace Papademos’s interim Cabinet.
Germany’s proposal for an EU-appointed overseer of Greece’s budget prompted consternation in Athens and led to a rejection by other European governments that warned against stigmatizing Greece.
“Greece is a sovereign nation and must enact the promises it’s made,” said French PresidentNicolas Sarkozy. “Surveillance of Greece’s progress is normal, but there was never any question of putting Greece under guardianship.”
Investors were seized by fresh doubts about the economic health of Portugal. Concern that the EU would break a promise not to restructure Portugal’s debt pushed 10-year yields up by 2.17 percentage points to 17.39 percent yesterday as two-year yields surged to 21 percent, both euro-era records.
‘Sustainable’ Portugal
Portugal’s debt has been judged “perfectly sustainable” by the EU and International Monetary Fund, Prime Minister Pedro Passos Coelho said. Asked if there is a risk of writedowns on Portuguese bonds, he said: “No, there is not.”
The Greek standoff and Portugal’s tottering market punctured the start-of-year crisis respite that had been nourished by 489 billion euros in three-year loans infused by the ECB into the banking system.
ECB loans enabled most bond markets to withstand the impact of credit rating downgrades byStandard & Poor’s. Ten-year yields in Italy, with debt estimated at 120.5 percent of gross domestic product in 2011, last week dipped below 6 percent for the first time since Dec. 6.
While Italian yields went back up to 6.09 percent yesterday, the government stockpiled cash for the year’s biggest bond redemption by selling 7.5 billion euros of debt, close to its maximum target.
Leaders completed the fiscal-discipline treaty, which speeds sanctions on high-deficit states and requires euro countries to anchor balanced-budget rules in national law. Eight countries outside the euro backed the pact, which was shunned by Britain and the Czech Republic.
French Elections
ECB President Mario Draghi said the fiscal compact “certainly will strengthen confidence in the euro area,” calling it “the first step toward the fiscal union.”
One potential hiccup emerged when Sarkozy said that ratification of the fiscal treaty in Francewill likely be delayed until after elections in April and May that polls show he will lose. The front-runner, Socialist Francois Hollande, has vowed to renegotiate the treaty, saying it is biased toward austerity and would put an additional squeeze on the economy.
With an eye toward Ireland, Germany pushed through provisions that only countries ratifying the fiscal compact will be eligible for aid from the permanent bailout fund, the European Stability Mechanism, now set to go into operation on July 1, a year ahead of schedule.
Bond Clauses
The permanent fund requires governments to put collective action clauses into new bond issues as of January 2013, five months later than previously planned. The clauses are common in U.S. and U.K. law, enabling a debt restructuring to go ahead by a vote of a supermajority of bondholders, denying a veto right to solitary investors.
“Collective action clauses shall be included, as of 1 January 2013, in all new euro area government securities, with maturity above one year, in a way which ensures that their legal impact is identical,” according to a final text of the statutes obtained by Bloomberg News.
While the clauses would leave the door open for future restructurings, the fund’s statutes deem write-offs “exceptional” and subject to IMF standards, the text says. It tones down language on “private sector involvement” — code for forcing bondholders to take losses on governments that fall too deeply into debt.
Leaders sidestepped mounting pressure to raise the ceiling on rescue lending from 500 billion euros once the permanent fund goes on line, sticking with plans to handle that question at the next summit on March 1-2.
Luxembourg Prime Minister Jean-Claude Juncker, Europe’s longest-serving leader and the head of the panel of euro finance ministers, summed up two years of crisis-fighting: “If I wasn’t optimistic you could have reported about my suicide months ago.”
Posted by Arne Ruhnau
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