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Italy’s Monti Signals Euro Crisis Abating as Yields Drop

Euro Ministers Set to Clear Greek Rescue Plan
Mario Monti, Italy's prime minister, gestures during a television interview inside the Chigi palace in Rome, on Feb. 29, 2012. Photographer: Alessia Pierdomenico/Bloomberg

Euro-area finance ministers are set to clear a second rescue for Greece today to avoid what Italian Prime Minister Mario Monti described as a potential “brutal outcome” for the Greek economy.

Euro finance chiefs, gathering in Brussels today before a summit of leaders from the 27-nation European Union, will review Greece’s progress on meeting the conditions of the 130 billion-euro ($173 billion) aid package, which they approved last week. That will pave the way for a loan payment before a March 20 Greek bond redemption and the completion of a debt exchange intended to ease the country’s financing load.

If leaders “had not come to an agreement on the second package, this might have brought a brutal outcome for Greece,” Monti said in an interview yesterday in Rome. That would have led to “contagion effects flowing to Spain, Italy, in spite of the good progress being made by these countries.”

Europe’s debt woes have eased this week after 1 trillion euros of emergency cash from the European Central Bank helped push the yield on Italy’s 10-year bonds -- and their risk premium to German securities -- to the lowest in six months. Yields on Italian two-year notes fell under 2 percent for the first time since October 2010.

Spain and France sold 12.5 billion euros of bonds today and Europe’s Stoxx 600 Index added 0.6 percent at 1:40 p.m. in Brussels.

Speaking to lawmakers at the European Parliament in Brussels yesterday, Luxembourg Prime Minister Jean-Claude Juncker said he expected the next aid payment to Greece by March 20 “at the latest” and he urged holders of Greek bonds to take up a debt-swap that will impose losses of more than 70 percent.

Completing the Swap

German Finance Minister Wolfgang Schaeuble said he expects Greece to complete the swap in two weeks if all conditions are met. If ministers clear the bailout package, the debt swap “should be concluded the week after next.”

Default insurance on Greek debt won’t be paid out, the International Swaps & Derivatives Association ruled today.

The ECB’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit-default swaps. ISDA’s determinations committee said the switch didn’t constitute subordination, one of the criteria for a payout under a restructuring credit event.


With officials including German Chancellor Angela Merkel expressing doubt that that bailout was no guarantee of success, Schaeuble said it’s “premature” to consider a third package. “We haven’t even signed off on the second one,” he said.

The finance chiefs from the 17-nation euro will probably officially complete that rescue today, an official told reporters yesterday on condition of anonymity. The country, swamped by debt and facing the prospect of default, received a 110 billion-euro lifeline in May 2010.

In the early hours today, Greek lawmakers approved cuts in pensions and health care a day after ratifying a 3.2 billion euro package of spending reductions, aiming to meet conditions for the bailout.

Officials are trying to maintain the region’s progress against the debt crisis triggered by Greece in 2009. Monti, signaling the worst may be over for the euro region’s most distressed bonds, said he expects leaders to strike a deal by the end of the month on expanding a debt-crisis firewall.

While Merkel has expressed reluctance to discuss increasing the size of Europe’s bailout funds at the summit, Monti said he’s “confident” a deal will come.

“Size matters,” said Monti. “If the approach to firewalls is constructive enough in Europe, I believe we will all be in a better position to face any further contagion effect or any resurgence of the crisis.”

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