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Markets Lend Their Support to Rescue Plan


A newsstand in Athens carried details about the bailout deal meant to help Greece and prevent its debt crisis from spreading.
Orestis Panagiotou/European Pressphoto Agency


Evangelos Venizelos, the Greek finance minister.
Simela Pantzartzi/European Pressphoto Agency

By STEPHEN CASTLE and NIKI KITSANTONIS
Published: July 22, 2011

Financial markets, at least one ratings agency and leaders in capitals across Europe on Friday gave cautious to enthusiastic votes of confidence for a sweeping deal to provide Greece with a second bailout.

Still, investors struggled to untangle the details and long-term implications of the deal, valued at 109 billion euros, or $156.6 billion. The most important was whether it would prove a lasting solution for the most indebted countries in the euro zone or be merely an interim effort to preserve the single currency.

Under the deal’s final details, for instance, Greece’s staggering debt will be reduced by only about 24 percent, not much given that it now totals more than 150 percent of the country’s annual gross domestic product. Analysts said it was also clear that in the end, the contribution from banks and insurance companies in the private sector would be relatively modest.

In the immediate term, financial markets approved; bank stocks, in particular, benefited. Greek, Irish and Spanish bonds rallied as well.

David Riley, head of sovereign ratings for Fitch, commented in an upbeat tone about the commitments made by euro area leaders “toward securing financial stability in the euro zone.”

Still, the rating agency said it would place Greek sovereign debt in “restricted default” and assign a “default” rating to the affected bonds when the country offers to exchange them for ones with longer terms. When the country issues new bonds, the agency said it would probably classify the securities as “low speculative-grade.”

Some senior European officials conceded Friday that the desire to have banks share in the losses by taking longer-term debt had destabilized markets and would have been better avoided. However, the officials said they saw banks’ participation as necessary to gain the support of the German chancellor, Angela Merkel, who has to assuage a restive public.

“I would have preferred not to have this private sector involvement,” said one senior European Commission official, speaking on the condition of anonymity.

“It was a sine qua non for some member states,” the official added, “but it would have been less risky and less expensive without” it.

The deal means an extra outlay for the donor countries because guarantees will have to be extended to ensure that the Greek banks are protected if Greece is classified in default. The architects of the rescue hope this will be for only a short period of time, limiting the cost.

Meanwhile, financing has to be put up for a bond buyback plan that, ultimately, will cause those in the private sector to take a loss. According to estimates provided by the euro zone countries, the net contribution of the private sector will be about 37 billion euros from 2011 to 2014.

That will come on top of the 109-billion-euro bailout for Greece, though this total does include an estimated 28 billion euros in receipts from privatization through 2014 and 20 billion euros for debt buybacks. How much will be lent by the International Monetary Fund has yet to be determined.

The International Swaps and Derivatives Association said the Greek rescue plan should not set off payments of credit-default swaps because the debt exchange plan would be voluntary.

European leaders want to tamp down debate about private sector losses, which has the potential to stoke investor worries about the debt of other euro countries.

During the summit meeting on Thursday that led to the deal, Jean-Claude Trichet, president of the European Central Bank, showed a graph illustrating the movement of bond spreads and how closely they were linked to discussion of the private sector contribution, according to a senior official of the European Commission, the executive arm of the bloc.

Though leaders pledged in the communiqué that this would not be repeated in any other case, the markets may take note that the reduced interest rates on Europe’s aid would make the finances of Ireland and Portugal more sustainable.

Lending rates for the three countries will fall to about 3.5 percent and loan maturities will be stretched out as long as 30 years.

“I don’t think the euro zone is out of the woods,” said Nicolas Véron, senior fellow at Bruegel, an economic research institute in Brussels, “but Ireland and Portugal have been strengthened. It is much more credible that they can meet their commitments than before.”

Some European officials believe that working with the big banks will help solidify the common currency.

Mr. Véron said that the bank inclusion was needed to make the deal politically plausible. “If the aim was to have a reduction in Greek debt manageable, then it has not been structured effectively,” he said. “But I don’t think that was the main intention.”

Matthew Saltmarsh and Raphael Minder contributed reporting.

© 2011 The New York Times Company

http://www.nytimes.com/2011/07/23/business/global/Reactions-to-the-Greece-Bailout-Plan.html


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Striving for Productivity, Chasing Germany



By FLOYD NORRIS
Published: July 22, 2011

IF the economies of the bailed-out countries in the euro zone are ever going to prosper again, they will have to somehow regain competitiveness with Germany, the dominant economy in the zone.

New figures released by the European Central Bank indicate that progress is being made, but it is slow.

The figures show that unit labor costs fell 3.3 percent in Greece during the first quarter, and were off 2 percent in Ireland. In Germany, the star economy of the euro zone, unit labor costs fell 0.7 percent.

Those reductions were won at a terrible cost, however. Greece’s economy continues to shrink, while Ireland’s seems to have stopped losing ground but has yet to grow. Unemployment is above 14 percent in Ireland and even higher in Greece.

The accompanying charts show the changes in unit labor costs in Ireland and Greece, as well as in Germany and four other large economies that use the euro — France, Italy, Spain and the Netherlands. The E.C.B. said similar figures for Portugal, the other bailed-out euro country, were not available.

The first set of charts shows the changes from the first quarter of 2010, just before the first Greek bailout forced the country to agree to an austerity program, through the first quarter of this year, the latest figures available.

During that period, Greek unit labor costs fell 7 percent, nearly twice as much as those in Germany. Ireland’s costs were down almost 6 percent. But all the other major countries continued to lose ground to Germany.

The second set of charts shows the changes in unit labor costs since the end of 2000, when Greece joined the euro zone. The figures are astounding. Germany’s unit labor costs declined nearly 7 percent over the period, a remarkable performance. All the other countries had increases, ranging from 11 percent in France to more than double that figure in Ireland.

If there were no euro, other European currencies would almost certainly have lost value against the German mark over the last decade. Instead, Germany’s trade surplus in goods rose sharply, while the rest of the euro zone’s combined trade deficit approximately doubled.

The reconvergence of the economies might be easier if Germany were to accept inflation, but it shows little inclination to do that. Indeed, largely because Germany has been growing at a rapid rate with some signs of inflationary pressures, the E.C.B. has begun to raise interest rates.

Unit labor costs are not the only variable in a country’s trade performance, but they are important. The rest of the euro zone still has a long way to go if it is to regain the competitive position it had only a few years ago.

Floyd Norris comments on finance and the economy in his blog at nytimes.com/norris [ http://economix.blogs.nytimes.com/author/floyd-norris/ ].

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Related

In Greek Pact, Compromises and Intrigues (July 23, 2011)
http://www.nytimes.com/2011/07/23/business/global/european-leaders-achieve-greek-deal-through-compromise.html

Players in a Greek Drama (July 23, 2011)
http://www.nytimes.com/2011/07/23/business/global/in-the-debt-drama-ratings-agencies-play-starring-role.html

News Analysis: Central Bank May Be Winner in Europe’s Debt Talks (July 23, 2011)
http://www.nytimes.com/2011/07/23/business/global/ecb-may-be-winner-in-debt-talks.html

Markets Lend Their Support to Rescue Plan (July 23, 2011)
http://www.nytimes.com/2011/07/23/business/global/Reactions-to-the-Greece-Bailout-Plan.html [above]

Earnings Propel Tech, And Subdue Industrials (July 23, 2011)
http://www.nytimes.com/2011/07/23/business/Daily-Stock-Market-Activity.html

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© 2011 The New York Times Company

http://www.nytimes.com/2011/07/23/business/economy/bailed-out-europe-strives-to-become-competitive-with-germany.html