April 11 (Bloomberg) -- European governments offered debt-burdened Greece a rescue package worth as much as 45 billion euros ($61 billion) at below-market interest rates as they try to end its fiscal crisis and restore confidence in the euro.
Forced into action by a surge in Greek borrowing costs to an 11-year high, euro-region finance ministers said they would offer as much as 30 billion euros in three-year loans in 2010 at around 5 percent. That’s less than the current three-year Greek bond yield of 6.98 percent. Another 15 billion euros would come from the International Monetary Fund.
“This is a step of clarification that markets are waiting for -- it shows there is money behind this,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels today after chairing the ministers’ conference call. “The initiative for activating the mechanism rests with the Greek government.”
With the euro facing the sternest test since its debut in 1999, the 16-nation bloc maneuvered around rules barring the bailout of debt-stricken countries, aiming to prevent Greece’s financial plight from spreading and to mute concerns about the currency’s viability. Germany also abandoned an earlier demand that Greece pay market rates.
The euro has dropped 5.7 percent against the dollar this year as the discord within Europe over the response to the Greek crisis sapped faith in Europe’s economic management. It now buys $1.35.
“This is a huge amount,” said Stephen Jen, managing director at BlueGold Capital Management LLP in London and a former IMF economist. “This is more than a bazooka. They have gone nuclear on the issue of Greece. In the short run the market is short Greek assets so we’ll get a rally in those.”
A Greek finance ministry official said today that market reaction to the aid package over the next few days will determine future developments. While Finance Minister George Papaconstantinou welcomed the announcement, he said the government wasn’t requesting the bailout and planned to go ahead with planned debt sales. Greek officials plan a roadshow to U.S. investors this month before selling a dollar-denominated bond.
Greece will need to continue to tap markets even if it triggers the bailout, Erik Nielsen, chief European economist at Goldman Sachs Group Inc. in London, said in a note to investors.
Not Over Yet
The 30 billion euros from the EU “will not fully cover the Greek government’s financing needs for the next 12 months, let alone for 3 years, so Greece will still rely on commercial money beyond the April-May payments, and whether such money will become available will very much depend on how credible the policy framework is and what investors think will happen beyond the program period,” he said. “Unfortunately, this thing is unlikely to go to bed any time soon.”
The teleconference of euro-region officials, which included European Central Bank President Jean-Claude Trichet, left open how much Greece might need in 2011 and 2012, the final years covered by today’s decision.
Aid will flow to the Greeks “when they ask for it,” Cypriot Finance Minister Charilaos Stavrakis told reporters in Nicosia. “The decision was unanimous.”
European governments would put up about two thirds of any aid, with the IMF chipping in the rest, European Union Economic and Monetary Commissioner Olli Rehn said.
“We cannot speak on behalf of the IMF, but we know that they are ready to cooperate and contribute with a substantial amount,” Rehn said. Greek, EU and IMF officials will meet tomorrow to discuss details.
European pledges in February and March to provide aid in an emergency failed to prevent Greek 10-year bond yields from soaring to 7.51 percent on April 8, according to Bloomberg generic prices, amid concern that Greek Prime Minister George Papandreou’s government will be swamped by its bills.
The jump in Greek yields to the highest since December 1998 helped overcome resistance to a loan package in Germany, which as Europe’s biggest economy would contribute almost a third of the loans, the largest single share.
The premium investors demand to buy Greek 10-year bonds instead of German bunds jumped to 442 basis points April 8, easing to 398 basis points the next day as speculation over a rescue gained steam.
In the compromise hammered out today, the European loans would be tied to Euribor and priced above rates charged by the IMF, a nod to German opposition to granting a subsidy to a country that failed to live within its means. The EU will offer a mix of fixed-rate and floating rate loans.
The IMF would charge less than the EU. Both types of funding would be offered at the same time, Rehn said. Transfers to Greece would be made by the ECB.
Greece last week raised its estimate of the 2009 deficit from 12.7 percent of gross domestic product to 12.9 percent, the highest in the euro’s history and more than four times the EU’s 3 percent limit.
While rules dictated by Germany in the 1990s foresee fines for countries that go over the limit, no penalty has ever been imposed. Germany also led the charge to loosen the rules in 2005 after three years of excessive deficits.
While all euro-region governments promised to contribute, some like Ireland would need parliamentary approval. Ireland, itself reeling from the financial crisis, would require “national legislation,” Finance Minister Brian Lenihan said in an e-mailed statement.
The Greek government has yet to request a European lifeline, confident that this year’s planned budget cut of 4 percentage points will stem speculation that it is heading for the euro region’s first-ever default. Fitch Ratings highlighted that risk by shaving Greece’s debt rating to BBB-, one level above junk, on April 9.
A combination of higher taxes, lower spending and salary cuts for public workers have prompted strikes and protests against Papandreou, a socialist elected in October on promises of raising wages.
The EU showed no sign of setting tougher conditions today. Rehn hailed the Greek government for implementing “a very bold and ambitious program.”
Greece needs to raise 11.6 billion euros by the end of May to cover maturing bonds, and another 20 billion euros by the end of the year to pay debt coupons and finance this year’s deficit.
The debt agency plans to offer 1.2 billion euros of six-month and one-year notes on April 13, in a test of investor confidence in today’s pledge. A global bond in dollars will be sold in the next two months, Petros Christodoulou, Greece’s debt-management head, said on March 31.
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