European governments offered debt-plagued Greece a rescue package worth as much as 45 billion euros ($61 billion) at below-market interest rates in a bid to stem its fiscal crisis and restore confidence in the euro. Greek bonds and stocks rallied and the euro gained.
Forced into action by a surge in Greek borrowing costs to an 11-year high euro-region finance ministers said on Sunday they would offer as much as 30 billion euros in three-year loans this year at around 5 percent. Greek three-year bond yields plunged 80 basis points to 6.18 percent. Another 15 billion euros would come from the International Monetary Fund or IMF.
“This is a huge amount” said Stephen Jen managing director at BlueGold Capital Management in London. “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.”
With the euro facing the stiffest 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 yield premium investors demand to hold Greek 10-year debt instead of benchmark German bunds dropped 48 basis points to 350 basis points Monday morning in London. Greece’s benchmark ASE Index climbed 4.7 percent at the start of trade.
The euro rose as much as 1.4 percent to $1.3629. The single currency has dropped 4.9 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.
Bond investors’ response will determine whether Greece needs to tap the aid a Greek Finance Ministry official said in Athens on Sunday. Finance Minister George Papaconstantinou said the government plans to go ahead with debt sales including a dollar-denominated bond without taking up the offer for aid.
A clear message:
The package “sends a clear message that nobody can play with our common currency and our common fate” Greek Prime Minister George Papandreou told reporters in Larnaca Cyprus.
Sunday’s teleconference of euro-region officials which included European Central Bank President Jean-Claude Trichet left open just how much Greece might need in 2011 and 2012 the final years covered by the package.
“It shows there is money behind this” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels after chairing the conference call. “The initiative for activating the mechanism rests with the Greek government.”
Europe’s contribution would represent 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.
The IMF was “ready to join the effort” Managing Director Dominique Strauss-Kahn said an in e-mailed statement without giving more details on the IMF contribution.
European rhetorical support in February and March 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 the Athens government will be swamped by its bills.
The jump in Greek yields to the highest since December 1998 helped overcome resistance to an aid package in Germany which as Europe’s biggest economy would contribute almost a third of the loans the largest single share.
Germany “has lost the competition” said Carsten Brzeski an economist at ING Group in Brussels. “All that fuss and talk about not putting taxpayer money at risk has been made obsolete.”
Nod to German opposition:
In the compromise hammered out on Sunday the European loans would be tied to Euribor and priced above rates charged by the IMF a nod to German opposition to subsidizing a country that lived beyond 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 European Central Bank.
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.
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.