A BARGAIN, but not a grand one. Euro-zone leaders surprised many on March 12th by agreeing on the main elements of a deal to salve Europe’s sovereign-debt crisis. With negotiations becoming fractious and markets unnerved by further ratings downgrades on Greek and Spanish debt, there had been fears that a deal might not be reached by a deadline of March 25th, when Europe’s heads of governments conclude their next meeting in Brussels. In the event, a special summit of euro-area leaders hammered the essentials out two weeks ahead of schedule.
A deal may have arrived early, but it was lightweight, too. That largely reflected the wishes of Angela Merkel, the German chancellor, who is hemmed in by antipathy among taxpayers back home to propping up profligate Greeks and others. The effective lending capacity of the European rescue funds will be bumped up to meet its original goal of €500 billion ($695 billion) through higher guarantees and injections of capital, though the precise mix and timing have yet to be spelt out. But the main fund, the European Financial Stability Facility (EFSF), will not be allowed to intervene in secondary government-debt markets, a job being undertaken reluctantly by the European Central Bank.
The EFSF will be able to purchase the bonds of rescued governments when they are newly issued. But that is likely to be of use only when those countries want to tap markets again. Meanwhile, high sovereign-debt yields in secondary markets have a knock-on effect on the borrowing costs of firms and banks in affected countries.
The deal held out the prospect of lower borrowing costs on rescue finance, subject to tougher conditions. The Greek government has secured a reduction of one percentage point in the interest rate charged on €80 billion of bilateral loans from euro-area countries arranged before the EFSF was set up. The maturity of these loans, and of an additional €30 billion from the IMF, will be extended from three to 7.5 years. In return the Greeks say they will privatise public assets worth €50 billion—though they will not sell off islands, despite calls from Bild, a German tabloid.
The new Irish government, led by Enda Kenny (pictured, with France’s Nicolas Sarkozy), had also hoped to extract a lower interest rate but came away empty-handed. The price for such a concession was that Ireland raise its low corporation-tax rate. Other euro-area countries, notably France, have long been unhappy about this tax competition. But the Irish refused to give ground on their 12.5% rate, which they regard as crucial for retaining the country’s appeal to foreign investors.
The deal also included a fleshed-out version of the “competitiveness pact” unveiled in February largely at the behest of Germany. The idea is to prevent a recurrence of the debt crisis by whipping euro-zone laggards into Teutonic shape through economic and fiscal workouts. Now redubbed the “pact for the euro”, it stipulates that all euro-zone countries put into law a pledge to get a grip on public debt.
Traders responded favourably to the deal: spreads tightened on the bond yields of peripheral euro-zone countries, compared with German Bunds. But prior attempts to resolve the crisis have brought only temporary relief (see chart) and this agreement is likely to be no different.
An early shock could be supplied by Portugal, whose credit rating was downgraded this week. Despite the Portuguese government’s decision on the eve of the summit to intensify its fiscal retrenchment, the country still looks likely to require a rescue. On March 16th Portugal had to raise yields on a sale of 12-month government bills by 27 basis points compared with the previous auction a fortnight earlier.
If Portugal did ask for help, it could prove another nasty moment for the euro area. The rescue funds are big enough to cope with Portugal but the fear is still that confidence in neighbouring Spain, a much bigger economy, would be shaken. Even if that peril is avoided, the paths to rehabilitation for Greece and Ireland look so difficult—the black hole that is the Irish banking system could get still deeper, for instance—that it is hard to see how they can escape without an eventual debt restructuring. After promising much, European leaders have delivered too little.
Source: www.economist.com
A deal may have arrived early, but it was lightweight, too. That largely reflected the wishes of Angela Merkel, the German chancellor, who is hemmed in by antipathy among taxpayers back home to propping up profligate Greeks and others. The effective lending capacity of the European rescue funds will be bumped up to meet its original goal of €500 billion ($695 billion) through higher guarantees and injections of capital, though the precise mix and timing have yet to be spelt out. But the main fund, the European Financial Stability Facility (EFSF), will not be allowed to intervene in secondary government-debt markets, a job being undertaken reluctantly by the European Central Bank.
The EFSF will be able to purchase the bonds of rescued governments when they are newly issued. But that is likely to be of use only when those countries want to tap markets again. Meanwhile, high sovereign-debt yields in secondary markets have a knock-on effect on the borrowing costs of firms and banks in affected countries.
The deal held out the prospect of lower borrowing costs on rescue finance, subject to tougher conditions. The Greek government has secured a reduction of one percentage point in the interest rate charged on €80 billion of bilateral loans from euro-area countries arranged before the EFSF was set up. The maturity of these loans, and of an additional €30 billion from the IMF, will be extended from three to 7.5 years. In return the Greeks say they will privatise public assets worth €50 billion—though they will not sell off islands, despite calls from Bild, a German tabloid.
The new Irish government, led by Enda Kenny (pictured, with France’s Nicolas Sarkozy), had also hoped to extract a lower interest rate but came away empty-handed. The price for such a concession was that Ireland raise its low corporation-tax rate. Other euro-area countries, notably France, have long been unhappy about this tax competition. But the Irish refused to give ground on their 12.5% rate, which they regard as crucial for retaining the country’s appeal to foreign investors.
The deal also included a fleshed-out version of the “competitiveness pact” unveiled in February largely at the behest of Germany. The idea is to prevent a recurrence of the debt crisis by whipping euro-zone laggards into Teutonic shape through economic and fiscal workouts. Now redubbed the “pact for the euro”, it stipulates that all euro-zone countries put into law a pledge to get a grip on public debt.
Traders responded favourably to the deal: spreads tightened on the bond yields of peripheral euro-zone countries, compared with German Bunds. But prior attempts to resolve the crisis have brought only temporary relief (see chart) and this agreement is likely to be no different.
An early shock could be supplied by Portugal, whose credit rating was downgraded this week. Despite the Portuguese government’s decision on the eve of the summit to intensify its fiscal retrenchment, the country still looks likely to require a rescue. On March 16th Portugal had to raise yields on a sale of 12-month government bills by 27 basis points compared with the previous auction a fortnight earlier.
If Portugal did ask for help, it could prove another nasty moment for the euro area. The rescue funds are big enough to cope with Portugal but the fear is still that confidence in neighbouring Spain, a much bigger economy, would be shaken. Even if that peril is avoided, the paths to rehabilitation for Greece and Ireland look so difficult—the black hole that is the Irish banking system could get still deeper, for instance—that it is hard to see how they can escape without an eventual debt restructuring. After promising much, European leaders have delivered too little.
Source: www.economist.com
No comments:
Post a Comment