E.U. leaders vow to help Greece but say it is too early for financial rescue
Friday, February 12, 2010
ATHENS -- European leaders pledged Thursday to help Greece cope with debt problems that are pummeling the euro on global markets, but they stopped short of promising the immediate financial bailout sought by investors to calm fears of a spreading crisis in Europe.
The euro is facing its biggest test since the principal European currency was launched 11 years ago, as concerns grow that massive shortfalls will force Greece into a sovereign debt default. With similar fears spreading to Portugal and Spain, the leaders of the region's strongest economies, Germany and France, joined other euro zone nations in effectively offering up an implicit guarantee. They suggested at a meeting in Brussels that they would step in to aid Greece if necessary -- but stated that it is still too early to put forward a rescue package, adding that Greece must first make good on its pledge to undertake painful budget cuts at home.
Although officials in Germany and France were scrambling behind the scenes to hash out the details of a contingency plan that could prop up Greece, the lack of a concrete plan dashed hopes of a clear path toward restoring market confidence, sparking a renewed sell-off of the euro. It fell to an eight-month low against the dollar, with volatile trade on European bond and stock markets.
If a debt crisis spread to a larger nation such as Spain -- still considered a remote possibility -- it could set off broader market turbulence and have a more direct effect on U.S. banks and pension funds holding European bonds. U.S. stocks rallied Thursday after the E.U. meeting.
German Chancellor Angela Merkel and French President Nicolas Sarkozy said Thursday that Greece had the support of euro-zone nations, but in a joint news conference both declined to give details of just how far that support would go. They noted that Greece had not yet asked for aid.
In any case, they said, assistance would be contingent on Greece holding firm to its promise to dramatically cut runaway spending, which it has said it would do by slashing public-sector salaries and raising taxes -- measures that have led to strikes on the streets of Athens.
"Greece won't be left alone, but there are rules and these rules must be adhered to," Merkel told reporters in Brussels.
'Important new step'
The move to back Greece, European officials say, appears likely to involve direct loans or loan guarantees from Germany and France, and perhaps some of the other financially sound members of the 16-nation euro zone. Another option is to have a consortium of banks, backed by Berlin and Paris, offer to buy Greek debt. European finance ministers, set to meet next week, are expected to fine-tune the strategy, officials said. Many think a deal would need to be hashed out soon to boost confidence in Greece before this spring, when the nation must sell $25 billion in debt or risk default.
The International Monetary Fund will be asked to offer advice to Greece as part of the agreement, though it would not provide financial assistance -- something Greece's larger euro zone partners view as too embarrassing for the European Union. The IMF said Thursday that it welcomed Europe's move, calling it an "important new step."
Not everyone agreed. "What they've basically done is say they will help Greece if it meets the terms of the plan to cut its deficit, but if it managed to do that, Greece wouldn't need any help," said Simon Tilford, chief economist at the Center for European Reform. "I certainly think they will come up with something more substantial. But today demonstrates that we may need a full-blown crisis in Greece before they are prepared to put money on the table."
Any bailout is considered controversial in Germany, the economic heart of the euro zone, where taxpayers have long feared they might be forced to rescue their less-responsible partners.
"You don't help an alcoholic by handing him another bottle," said Frank Schaeffler, a lawmaker from the Free Democratic Party, part of Merkel's ruling coalition. "We should not get nervous now only because a few Greeks are taking to the streets. If we start helping out Greece today, Spain may be next in line, and so on."
Analysts say Greece's woes have exposed vulnerabilities in the euro, as well as the political and economic union that backs it. Current rules, for instance, forbid the European Union and European Central Bank to aid a member nation suffering from fiscal shortfalls, under the argument that such a safety net would remove the incentive for nations like Greece to control their spending.
Yet, at the same time, the lack of a crisis management plan has left the major European economies fumbling for a way to stop the investor panic in Greece and ease the pressure on the euro without violating E.U. laws.
"What will have to come out of this is a combination of stronger integration and rules for crisis management, which were completely missing in the euro zone and which we're now inventing on the spot," said Jean Pisani-Ferry, director of the Brussels-based think tank Bruegel.
To maintain a stable euro, analysts say, member nations will need to chip away further at the walls between them, bringing everything from their fiscal spending to their labor policies more in line with one another. Some view the current crisis as a catalyst for just that, with the vow of support expressed in Brussels indicating a grudging willingness to compromise on national interests.
In Greece, where public workers have vowed to continue the strikes, the news that their larger neighbors may ride to their aid brought a mixed response. Some complained of the E.U.'s insistence on tough austerity measures, saying they would drive Greece's economy deeper into recession. But others seemed grateful for the show of solidarity.