A rescue plan announced by the Eurozone countries would provide Greece with a direct loan from a government pool of funds in the event of emergency. Initial reaction to the ambiguous rescue plan has been positive, with a slight gain in the value of the Euro, and reduction in Greece’s 10-year bond yields. See the following article from Money Morning for more on this.
Eurozone countries yesterday (Monday) drew up a rescue plan to safeguard the euro in case Greece defaults on its debt in the hopes of stabilizing its currency.
Broadcasting the fact that Greece’s euro partners have drawn up an emergency loan strategy is meant to steady the bond markets and give investors confidence in Greece’s ability to pull out of its debt crisis, analysts said. The decision also pressures Greece to rely on its own measures for resolution.
“The objective would not be to provide financing at average Eurozone interest rates, but to safeguard financial stability in the euro area as a whole,” the European finance ministers said in a statement.
If the rescue plan is enacted, it will most likely offer direct loans to Greece from a government pool of funds, but there will be no loan guarantees. Contributing to the loan amount will be voluntary, although all Eurozone countries are likely to make a payment, in a sign of unity.
However, key details were omitted from the aid announcement, like what would trigger the emergency loan and how much Greece might receive. The ministers’ vague outline of what the plan entails emphasizes their hope that the plan will never actually be needed.
“The clear hope is that the mere promise of support will reassure investors enough to bring Greek bond yields down further,” Ben May, an economist at Capital Economics Ltd. in London, told Bloomberg. “But if this does not happen, Eurozone governments will come under greater pressure to provide further details.”
The 16 countries using the euro say they are ready to assist Greece if needed, but that the country is not near default and should continue with its austerity plan, which includes drastic measures to cut its deficit from 12.7% gross domestic product (GDP) to 8.7%.
Greece’s austerity plan provisions impressed its euro neighbors, showing them it’s more than ready to untangle its fiscal web.
“You’re starting to see some tangible benefits of the austerity measures Greece has put in place,” Peter Chatwell, a fixed-income strategist at Credit Agricole CIB in London, told Bloomberg. “They’ve made it through the immediate danger, now Greece needs to stick to what it has planned.”
The initial reaction to the Eurozone countries’ pledge of support moved markets in a direction favoring Greece: Greek bonds’ 10-year yields fell to 6.14%, resulting in a 300 basis-point spread over benchmark German 10-year bonds – the lowest spread since March 5, right after Greece released its austerity plan.
The euro gained 0.6% yesterday (Tuesday), reducing this year’s value decline to 4.5%.
Standard & Poor’s took Greece off its “CreditWatch negative” list. Greece currently has an investment-grade BBB+ rating.
Greece has not yet made a formal request for aid, but has been asking for a declaration of support from its Eurozone counterparts. This decision marks the first time in the euro’s 11-year existence that one Eurozone country might receive aid from another.
The countries have been clear in defining the aid to be different than a government bailout, which is prohibited under the Eurozone law.
“There will be no bail-out, because Greece has to solve its own problems concerning government debt,” said Dutch finance minister Jan Kees de Jager.
The loans are not designed to be a desirable option but instead a last resort for Greece if it is not able to meet its debt obligations. Greece is encouraged to use the capital markets to find a better rate for refinancing.
The Eurozone countries’ decision is seen as a good short-term solution which could help Greece meet its $27.5 billion debt obligations maturing in April-May, but analysts are less sure of its ability for long-term success.
“That is still very unclear, particularly as their economy is likely to see a much bigger contraction than is forecast and they have to pay elevated interest rates in the market, which are difficult to sustain,” Richard Batty, investment director of strategy at Standard Life Investments, told Financial Times.
The plan will need approval from all European Union (EU) countries, scheduled to meet March 25-26.
This article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.