Euro zone: Greek contagion quarantined

Clemens Bilan/AP - German chancellor Angela Merkel smiles into the cameras prior to a press conference in Berlin Friday July 22, 2011.

It took a year and a half of politicking that pushed markets to the edge more than once, but Europe’s leaders this week may have reached an elusive goal: Make sure that what happens in Greece stays in Greece.

That was the initial verdict from analysts and investors who said the measures adopted in Brussels on Thursday, including more than $150 billion in fresh emergency loans for the government in Athens, mark an important step in strengthening the euro currency zone.

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July 22 (Bloomberg) -- Erik Berglof, chief economist at the European Bank for Reconstruction and Development, talks about European efforts to end the 21-month sovereign bond crisis.

July 22 (Bloomberg) -- Erik Berglof, chief economist at the European Bank for Reconstruction and Development, talks about European efforts to end the 21-month sovereign bond crisis.

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It isn’t perfect, and there are major open questions about whether, for example, the amount of money committed by euro-area governments so far is adequate to pay for the policies they have approved. Also ahead is a likely default declaration by credit-rating agencies once they review the terms of a plan for banks to contribute to Greece’s rescue, an event European officials now think they can navigate without much disruption.

Taken together, they argue, the new policies make it much less likely that the economic problems festering in Greece will cause a run on financial institutions in Spain, a financing crisis in Italy or a credit crunch in the United States.

“This goes much further than previous measures,” said David Tan, head of global ratings at J.P. Morgan Asset Management. “It gives us light at the end of the tunnel.”

European markets continued rising Friday in the aftermath of the Brussels summit, with major indices all gaining ground.

Across the region, the results of the session seemed to bring a sigh of relief at the advent of what French President Nicolas Sarkozy was calling the “European Monetary Fund” — a collective agreement by the 17 nations sharing the euro to back up one another’s banks and one another’s governments with whatever financing is necessary.

Significantly, help can now be extended before a country runs into trouble, through the use of credit lines and other measures meant to prevent euro-area governments from reaching a crisis in which they are locked out of bond markets and threaten larger problems.

In Britain, a country that does not use the euro but whose deep ties to the euro zone give it a stake in the region’s policies, Finance Minister George Osborne praised the outcome — and preached the importance of a follow-through. The changes approved by the heads of state will need approval in national parliaments, decisions about how the new programs will be put into operation, enough money to make it all work — and longer-term commitment to a host of remaining economic reforms.

The Brussels summit shows “that euro-zone political leaders can take decisive economic action,” Osborne said. “They have shown they can get a grip. Now they need to keep it.”

Alberto Giovannini, chief executive of Unifortune Asset Management in Milan, said the Brussels summit surpassed expectations — an important fact during a crisis that partly stemmed from doubt about the ability of euro-area leaders to come to terms.

The program itself “may not be the magic wand, but it clearly has indicated that political will is significant,” he said.

Key to the outcome were talks between Sarkozy, German Chancellor Angela Merkel and European Central Bank President Jean-Claude Trichet. While there were elements of compromise throughout the agreement, it was arguably Merkel who traveled the furthest. Hesitant a little more than a year ago to put any of her public’s money on the line for Greece — for fear of the “moral hazard” of indulging a country that spent too much — she has now positioned Germany as the euro’s ultimate backstop.

Germany will contribute much of the funding for the more than $600 billion European Financial Stability Facility, the uses of which are being expanded to include things German officials had frequently opposed, such as using the money to buy another nation’s bonds to keep interest rates down.

In Berlin on Friday, Merkel said she considered it her “historical duty” to make sure the euro survived the current crisis.

“The euro is good for us; the euro is part of Germany’s economic success; and a Europe without the euro is unthinkable,” Merkel said, according to wire service accounts.

She’ll have some explaining to do back home, where the Brussels outcome garnered mixed reviews. Business leaders and the head of the Free Democrats, Merkel’s junior coalition partner, signed on, but several finance leaders in parliament said that they wanted to review the new program.

“If the Greeks are getting money, then parliament needs to be consulted first,” said Klaus-Peter Willsch, the budget expert for Merkel’s Christian Democrats, in the Mitteldeutschen Zeitung, a newspaper. He called for a special session.

“What they’re doing now . . . only means that we’re making credit available again. But it doesn’t change the fact that the Greeks are in no position to pay off this gigantic mountain of debt,” said Sigmar Gabriel, the head of the opposition Social Democrats, on German television.

There is, inarguably, much left for Greece to do. A massive privatization scheme will be difficult politically, and changes to the country’s economic structure will be hard on vested interests and professions.

But the assistance now on the table is substantial. It includes about $70 billion in expected concessions from banks and other private bond holders who have pledged to leave their current holdings in place for as long as 30 years on favorable terms — in effect reducing the value of what Greece owes them by an estimated 20 percent.

Between that, and the concessionary, low-interest terms on which the new rescue loans are being offered by European governments, the size of Greece’s outstanding debt may be cut by the equivalent of 30 percent of the country’s annual economic output.

The International Monetary Fund is also expected to contribute new financing.

Greek Finance Minister Evangelos Venizelos will be in Washington next week for meetings with Treasury Secretary Timothy F. Geithner and officials at the IMF.

While Managing Director Christine Lagarde said that the program would be independently reviewed by the IMF’s board, it is clear that it is meant to hang together as a whole. The offer made by the banks is “conditioned on . . . additional support by the IMF,” according to documents released by the Institute of International Finance outlining the deal.

 
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