European markets nervous over new bailout deal for Greece

Germany’s Angela Merkel and France’s Nicolas Sarkozy have hammered out a deal ahead of a crisis summit of European leaders in Brussels Markets were on tenterhooks on Thursday morning after Germany and France hammered out a last-minute deal on a second bailout of Greece intended to rescue both it and the euro from financial ruin. French president Nicolas Sarkozy rushed to Berlin on Wednesday and spent six to seven hours talking to German chancellor Angela Merkel ahead of a crisis summit in Brussels. They managed to agree a compromise on the losses that Greece’s private creditors are to take, in a complex new bailout for Athens. European Central Bank president Jean-Claude Trichet, who has been Merkel’s most vocal opponent in the wrangling over how to respond to the euro crisis, attended part of the talks. The deal, following a telephone dispute between the two leaders on Tuesday, is to be put to the heads of the European commission, council and central bank on Thursday morning before an emergency summit of the 17 leaders of eurozone countries. The euro hung on to gains, trading at $1.460 after rallying to the highest level for a week on Wednesday night. Stock markets across Europe were nervous, with the FTSE 100 index falling 3 points to 5850 in early trading. Gilts slid along with Bunds on hopes of a bailout. European shares initially rose, led by banking stocks, before turning negative. “France and Germany striking an accord is very good news for the eurozone and is what we have been looking for and it has been greeted quite well,” said Will Hedden, sales trader at IG Index. “But the risk of contagion still remains, the Greece problems has not really gone away, just been brushed aside.” The new bailout would supplement the €110bn (£97bn) package for Greece launched in May last year. It is expected to include fresh emergency loans to Athens from eurozone governments and the International Monetary Fund, as well as other measures. Former UK chancellor Alistair Darling said on the BBC Today programme: “We are involved in this. Most of our exports go to European countries. You can see real calamity facing us.” He pointed to the possibility of the US losing its prized top-notch credit rating, the eurozone troubles and “sluggish growth” in Britain. No details of the Berlin pact were revealed, leaving analysts to speculate. “Markets will react positively if they get a sense that the politicians and central bankers are getting ahead of the curve,” said Louise Cooper, markets analyst at BGC Partners in London. Senior officials at the European commission in Brussels indicated a compromise was in the air to save Greece and halt contagion by levying a tax on banks in the eurozone – opposed by Berlin and proposed by Paris – as well as a long-term Greek debt rollover stretching for decades, and other measures aimed at reducing Greece’s crippling debt level. It appeared that the multi-pronged formula would inexorably lead to Greece being deemed to be in sovereign default, at least temporarily. Cooper said: “So what is in this deal? Well the plan to make private sector bond holders share the pain via a eurozone bank tax, seems to be firmly on the table. But this is rather a circuitous route, from A (Greece cannot afford to pay back it’s debt) to B (the banks who hold their bonds need to accept less back from Greece). The direct route from A to B was limited by the credit ratings agencies – they warned that the French plan to ‘voluntarily’ roll over Greek debt would constitute a default. So the power players are taking a more tortuous route to ensure that banks ‘share the pain’. “However the end result is still the same – that banks will make less profit – either they take writedowns on their Greek debt (classic default) or they pay more tax. Less profits, less retained earnings, less capital. And already many European banks are undercapitalised – draft proposals suggest that a total of €460bn of capital needs to be raised by 2019 by banks. Getting banks to pay more tax is only going to make the underlying problem worse – banks need more capital – where are they going to get it from?” The Brussels summit – the 10th time in 18 months that European leaders have tried to save the euro and Greece from collapse – is being staged amid grave pessimism that politicians will be able to bury their differences and combine to rescue the single currency. It remains to be seen if the Franco-German compromise can win the support of other leaders and goes far enough to satisfy the financial markets. Amid a febrile mood and an ominous sense that the euro was facing a make-or-break moment, an unusual hush descended on the key European capitals on Wednesday. It was as if leaders and officials had been struck dumb by the weight of the responsibility bearing down on them. The silence was broken only by José Manuel Barroso, the president of the European commission, who chastised the current crop of EU leaders, declaring that “history will judge this generation of leaders harshly” if they refuse to act decisively in the euro’s darkest hour. The main challenge is to forge a pact that will reduce Greece’s crippling level of debt. The fundamental issue is who pays for that. On Wednesday night, the Germans insisted that Greece’s private creditors pick up a large part of the tab, the main dispute with Sarkozy and Trichet. The markets are more than jittery, and Washington is nervous. President Barack Obama intervened on Tuesday by phoning Merkel. Daiwa Capital Markets said: “Might this meeting finally bring an end to the farce surrounding the euro area’s response to Greece? No chance.” Amid growing calls from Washington, the IMF, and the markets for a radical step towards eurozone fiscal union as the only hope of saving Greece from default and inoculating the euro, the Germans exasperated many by pooh-poohing such notions. “I know there’s a great longing for a big decision, proposals for eurobonds, a big restructuring [of Greek debt], for a transfer union, and much besides,” said Merkel on Tuesday. “I will not give in to this. The government will not give in to this.” New suggestions this week from France are to impose a levy on eurozone banks, raising €10bn a year. This is problematic. It would take time to establish, would penalise banks not exposed in Greece, would exempt non-eurozone banks lending to Greece, and would run into political opposition in national legislatures. The advantage is it would impose private creditor involvement without seeing Greece declared to be in default. Other options are lower interest rates on loans to Greece, debt rollovers or swapping bonds for longer maturities, using the €440bn eurozone bailout fund. The talk in Brussels was of a combination of rollover, bank levies, and haircuts that could cut Greece’s debt by about a quarter. The reported Berlin pact was believed to be a mixture of the various options. “What cocktail will they make out of all this?” said a senior commission official. “The real priority is that they produce a cocktail that everyone can drink.” The major challenge was to finesse the complex package in a way that does not trigger declaration of Greek default by the international ratings agencies. That looked unlikely. The ECB is warning it will refuse to accept defaulted bonds as collateral from Greek banks in return for liquidity to keep them afloat. The eurozone taxpayer, in the form of the European financial stability facility, would then need to step in to save the Greek banks or risk a wider European banking crash. The crisis has been compounded in the past fortnight by Italy, whose borrowing costs are also now close to unsustainable. “Either we act as Europe, or we are not actors at all,” warned Barroso. “The situation is very serious. It requires a response. Otherwise the negative consequences will be felt in all corners of Europe and beyond. Leaders need to come to the table saying what they can do and what they want to do and what they will do. Not what they can’t do and won’t do.” European debt crisis Euro Europe Europe Euro Angela Merkel Greece Nicolas Sarkozy Julia Kollewe Ian Traynor guardian.co.uk

Posted by on July 21, 2011. Filed under News, Politics, World News. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.