Eurozone leaders draw up radical plan to safeguard euro

Draft agreement at emergency summit provides for vast expansion in the role and powers of eurozone bailout fund European leaders are poised to take a quantum leap to safeguard the future of the euro and rescue Greece from insolvency by turning the eurozone’s 15-month-old bailout fund into a much more ambitious instrument resembling an embryonic European monetary fund. The deal being hatched at an emergency summit of eurozone leaders also looked certain to entail haircuts – losses – for Athens’ private investors, increasing the likelihood that Greece will become the first eurozone country deemed to be in some form of default on its sovereign debt. A 15-point draft agreement being negotiated provided for a vast expansion in the role and powers of the €440bn bailout fund established in May last year. If finally agreed, the package would be the biggest eurozone move since it created the bailout fund, following months of acrimony and dithering that prompted bitter criticism of EU leaders, particularly Chancellor Angela Merkel of Germany. Currently the fund can only be used as a last resort to rescue a eurozone country whose plight jeopardises the stability of the euro as a whole. Under the radical plan, the fund would be able to intervene on the secondary markets to buy up the bonds of struggling debtor countries, to take pre-emptive or “precautionary” action to nip a debt crisis in the bud by, for example, agreeing lines of credit, to supply loans to struggling eurozone countries which would then use the money to shore up and recapitalise their banks. Such aid would apply, unlike at present, to countries not already in bailout programmes. The transformation of the bailout fund was directed not so much at Greece as at containing the threat of contagion to other vulnerable eurozone countries, an attempt to curb market uncertainty over the fate of the euro. If agreed, the rules governing the use of the bailout fund would need to be rewritten, throwing up political problems mainly in Germany and the Netherlands. Senior German government sources, however, said the new regime was acceptable to Merkel who would push it through the German parliament. As part of a new three-year rescue package for Greece, the summit appeared willing to countenance an effective Greek default, however temporarily and however “selectively” in order to satisfy German, Dutch and Finnish insistence that the country’s private creditors had to bear some of the costs of the new bailout by taking losses on their investments. The draft statement did not put a figure on the investors’ losses, but said: “The financial sector has indicated its willingness to support Greece on a voluntary basis through a menu of options (bond exchange, roll-over, and buyback) at lending conditions comparable to public support with credit enhancement.” In an attempt to satisfy the financial markets and the credit ratings agencies that there was no prospect of investors having to take losses elsewhere in the eurozone, the draft agreement said: “As far as our general approach to private sector involvement in the euro area is concerned, we would like to make it clear that Greece is in a uniquely grave situation. This is the reason it requires an exceptional solution.” Senior German and French bankers briefed the leaders on the various models for private sector involvement, proposing haircuts of around €17bn in a second rescue package worth €88bn, with eurozone governments and the International Monetary Fund supplying the other €71bn. German government sources indicated the creditors were writing off 20% of their investments. The €17bn losses, said a paper from the banks obtained by Reuters, “would almost certainly result in Greece entering selective default”. Senior eurozone government sources agreed that a Greek default looked inevitable, but that the summit was prepared to take that risk in defiance of warnings from the European Central Bank. Sources said eurozone leaders believed the default would last no longer than two months. The Dutch government said that objections to accepting selective default, mainly from the ECB, had been overcome. Jean-Claude Trichet, the ECB chief, has warned that the bank will no longer keep Greek banks afloat by supplying liquidity for defaulted bond collateral. That role would probably shift, at least temporarily, to the eurozone bailout fund. German government sources said they had received assurances from the international ratings agencies that they would not rush to judgment in declaring a Greek default but would take their time in studying whatever finally emerged and for it to impact on Greece’s private creditors. The eurozone loans would be provided at interest rates of 3.5%, two points lower than currently, while the maturity of loans to Greece would be more than doubled to at least 15 years. There was also good news for Ireland and Portugal whose borrowing costs for their eurozone bailouts would also fall to 3.5%. As well as bailout funds, on top of the €110bn granted to Greece last year, the blueprint was also expected to entail a buyback of Greek bonds. Taken together, the lower borrowing costs, longer maturities, investor losses, buyback and bailout money were all aimed at reducing Greece’s debt burden of €340bn, making the debt sustainable and improving the prospects of Greek economic and financial recovery. On estimates from the European Commission, the package could cut Greece’s debt levels by €90bn. European debt crisis Euro European monetary union Europe Currencies Economics Euro Greece European Union Europe 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.