Markets back European debt crisis deal _ for now

AP News
Posted: Mar 14, 2011 2:27 PM
Markets back European debt crisis deal _ for now

Greece was the big winner in the markets Monday after the EU agreed to a surprisingly broad package of measures to tackle the debt crisis that has for over a year threatened the existence of the euro currency.

On the weekend, eurozone leaders increased the lending power of the bailout fund and revealed it can be used to buy bonds directly from governments in exceptional circumstances _ but only if they agree to further austerity measures. They also eased the bailout terms for Greece, significantly brightening its financial outlook.

The deal took markets by surprise, especially as German Chancellor Angela Merkel had been sounding an increasingly strident tone against paying up for profligate governments.

Though analysts said the deal doesn't mean the crisis has come to an end _ the governments in the so-called "periphery" have years and years of austerity ahead of them _ the hope in the markets is that the EU is better prepared to deal with another debt crisis flare-up.

"Ultimately only fiscal discipline and most importantly, the resumption of sustained economic growth, will resolve the crisis," said David Riley, head of global sovereign ratings at Fitch. "Last Friday's decisions by euro area heads provide more time for both, but no more than that."

That appears to be the prevailing view in the markets. The euro rose a mild 0.4 percent on the day to $1.3992, its gain buffeted by global markets' volatile reaction to Japan's massive earthquake, while bond and stock prices rallied.

At the close, the ten-year yield on Spanish government bonds was down 0.16 percentage point to 5.27 percent, while Portugal's was 0.16 percentage point lower at 7.44 percent.

Greece was the standout performer _ its yield slumped a significant 0.38 percentage points to 12.43 percent after Prime Minister George Papandreou managed to negotiate a 1 percentage point decrease in the country's bailout loan interest rate and an almost doubling of the repayment period to 7 1/2 years. The yield had slid even more earlier in the day.

Stock markets in the peripheral European countries withstood the selling pressure afflicting many of the world's major indexes _ Greece's main index spiked over 5 percent, Portugal's was up 1 percent and Spain's was more or less flat.

Analysts said Greece's easier bailout terms give it more breathing space to manage its mountain of debt, though whether it does anything more than delay an inevitable default remains open to question.

"While this is a clear relief for Greece and will reduce some of the pressure on the sovereign, it is unlikely to make the market more comfortable with the stock of debt," said Jacques Cailloux, chief European economist at Royal Bank of Scotland.

The positive impact of the EU deal on Portugal and Spain was less direct. Though Portugal was helped by the prospect that the bailout fund could buy its bonds, the country could still end up requiring a rescue _ after all, its benchmark bond yield remains above the 7 percent the government says is unsustainable in the long run.

The mood was darker in Ireland, whose government did not get a similar deal to that of Greece because it refused to increase its super-low corporate tax rate. Countries like France and Germany have complained that the low corporate tax effectively siphons off business from other euro countries by offering a low-cost environment for multinational corporations.

Michael Noonan, Ireland's new finance minister, defended the government's position, arguing that higher corporate taxes would hurt manufacturing and exports, making it even harder for Ireland to repay its massive debts.

"There's no way we're going to concede on the corporate tax rate as a quid pro quo for the interest rate and it's unreasonable to expect us to do that," Noonan said in Brussels, where he was attending a monthly meeting of eurozone finance ministers.

He also emphasized that Saturday's EU deal did not address Ireland's banking problem, the issue that triggered the country's financial crisis.

The results of special stress test on Ireland's banks due at the end of the month will likely reveal capital holes that go beyond the euro10 billion that were foreseen for initial bank recapitalizations in the country's euro67.5 billion bailout deal, Noonan said.

"Affordability isn't so much the issue as sustainability and as so long as it continues to be seen as part of sovereign debt rather than distinct bank debt there remains a problem," he told reporters.

But Noonan did not find much sympathy for his calls for more help with the country's bank debt. "I had a meeting with him," Jean-claude Juncker, the prime minister of Luxembourg who chairs the eurozone finance ministers meetings, remarked dryly when asked about Noonan's request.

Monday's meeting mostly amounted to a stock-taking of Saturday's deal, with finance ministers struggling to turn the leaders' broad decisions into practice.

For instance, there is no agreement yet on how the European Financial Stability Facility will actually be able to lend out its headline euro440 billion ($614 billion) sum _ whether all countries have to increase their guarantees, whether some would pay in capital and whether some economically weaker countries like Slovakia might get a discount.

"This is something that still needs further discussion," Juncker said, but stressed that "the differences are not very big, they are minimal."


Gabriele Steinhauser and Greg Keller in Brussels contributed to this story.