Investors reassured that loan facility can save Greece

Markets stabilise but there is concern that crisis is spreading to other member states.

FFinancial markets responded positively this morning to indications that the eurozone countries and the International Monetary Fund (IMF) will offer Greece a three-year €120 billion loan facility. But there are serious concerns that the crisis is spreading uncontrollably to other member states.

Dominique Strauss-Kahn, the director-general of the IMF, used the €120bn figure yesterday (28 April) when speaking to German parliamentarians, but it has yet to be confirmed by eurozone countries. It did, however, reassure investors that the facility may be big enough to save Greece from having to restructure its debt. Finance ministers and the European Commission agreed on 11 April that the facility would have a budget of €45bn for 2010, but refused to confirm amounts for subsequent years.

Olli Rehn, the European commissioner for economic and monetary affairs, said that the facility would “give Greece a sufficient breathing space from the pressures of the financial markets to decisively restore the sustainability of its public finances”.

Stabilising markets

The euro stabilised this morning at €1.321 against the dollar after falling to a one-year low of €1.3113 yesterday. The premium that investors demand to hold Greek ten-year bonds compared to German government bonds also fell by 15 basis points. The stabilisation followed two days of turmoil in which global markets have fallen sharply and Greek borrowing costs have soared far beyond those of emerging countries as investors became convinced that Greece would have to restructure its debt.

The relief from further market turmoil is likely to be short-lived, however, unless money from the loan facility is released soon. Investors are acutely aware that Greece needs to find €8.5bn by 19 May to refinance its existing loans.

In a sign of the international dimension of the crisis, Barack Obama, the US president, yesterday called Angela Merkel, Germany’s chancellor, to express concern that the eurozone was not acting fast enough to deal with the problem. The White House said that the two leaders had “discussed the importance of resolute action by Greece and timely support from the IMF and Europe to address Greece’s economic difficulties”.

Rehn said that support for Greece was necessary to “safeguard financial stability in Europe and globally”. He said that the IMF and eurozone were acting in Greece to protect “every euro area member state and its citizens”.

German regional election

Germany is struggling to quell accusations that it has made the crisis worse by delaying triggering the package until after a regional election in North Rhine-Westphalia, Germany’s largest federal state, on 9 May.

The state is currently ruled by a coalition of Merkel’s Christian Democratic Union and the liberal Free Democrats. But support for both parties has fallen recently. Rescuing Greece is very unpopular in Germany, with a recent poll suggesting that 57% of voters were opposed to providing Greece with a loan.

Strauss-Kahn and Jean-Claude Trichet, the president of the European Central Bank (ECB), yesterday took the unprecedented step of directly briefing German parliamentarians on the joint rescue package.

Credit-rating downgrades

Yesterday’s decision by Standard and Poor’s, a credit-rating agency, to downgrade Spain’s sovereign debt by one notch has fuelled concerns that Greece’s problems are spreading to other member states. The move followed Tuesday’s decision by Standard & Poor’s to lower Portugal’s rating by two notches.

The Portuguese government and opposition yesterday held an emergency meeting in which they agreed a programme of austerity measures to rein in the country’s budget deficit and reassure markets. The measures go beyond a budget consolidation plan submitted to the European Commission earlier this year.

“It’s not a question of the danger of contagion; contagion has already happened,” said Angel Gurria, the secretary-general of the Organisation for Economic Cooperation and Development. “This is like Ebola. When you realise you have it, you have to cut your leg off in order to survive.”

Strauss-Kahn warned that the “stability of the eurozone” was at stake if the loan facility was not activated quickly.

Greek fiscal adjustments

Merkel said that work on finalising the conditions to be attached to the loan facility would be accelerated. Officials from the Commission, the European Central Bank, and the IMF have been in Athens negotiating discussions with the Greek government since last week.

“I am confident the talks will be concluded in the next days,” Rehn said. “The outcome will be a multiannual programme that will lead to major fiscal and also structural adjustments,” he added.

Rehn gave a clear warning to Greece that financial support would be cut off unless Greece “at every stage” met “the conditions of fiscal consolidation and structural reforms”.

Herman Van Rompuy, the president of the European Council, said he will call an extraordinary summit of eurozone leaders to trigger to loan facility. The summit is expected to take place on 10 May, but a date will not be fixed until tomorrow (30 April) at the earliest because Van Rompuy is today travelling back from Japan.