–Longer-Term Eurozone Debt Sustainability Issues Remain
BRUSSELS (MNI) – Eurozone finance ministers have reached a
politically “acceptable compromise” in offering Eur30 billion in
bilateral aid to Greece but the deal – if activated – could prove a
difficult pill to swallow for other Eurozone countries struggling to
manage their own debts and deficits and doesn’t make allowance for other
countries encountering similar problems.
Eurozone finance ministers Sunday agreed to put together a joint
Eurozone-International Monetary Fund deal and to offer Eur30 billion of
bilateral loans this year to aid heavily-indebted Greece at a rate of
around 5%, if needed, together with additional IMF loans worth up to
E15 billion.
But providing such help could be a difficult political sell for
some countries, such as Ireland, Portugal and Italy, who are grappling
to deal with their own debts and deficits.
Germany, also has a difficult political situation to manage, with
Chancellor Angela Merkel until very recently saying that no German
taxpayers’ money would be put at risk.
And, although Sunday’s deal doesn’t commit Eurozone members to
providing money yet, because Greece hasn’t asked for it, the offer of
loans is politically symbolic.
“Some member states found it difficult, that Greece would get
better treatment than other countries,” an EU official said, speaking on
condition of anonymity.
In the end, the official said, concerns over the stability of the
single currency and a political will to present a united Eurozone front
won out and a deal was struck where Eurozone countries would contribute
to the loans in line with their participation in the European Central
Bank’s capital, which is based on relative population size and gross
domestic product.
According to BNP Paribas calculations, of the E30 billion coming
from the Eurozone, Germany, as the largest economy in the Eurozone,
would put forward E8.4 billion, about 0.3% of German gross domestic
product.
France would contribute E6.3 billion, Italy E5.5 billion, Spain
E3.7 billion and the Netherlands E1.8 billion. Belgium would contribute
E1.1 billion, Austria E0.9 billion, Portugal E0.8 billion, Finland E0.5
billion, Ireland E0.5 billion.
Markets reacted well to the deal, with Greek bond spreads narrowing
in Monday’s trading session. Privately, Eurozone officials hope that the
safety net won’t have to be used, because the reassurance given to the
markets will bring Greek bond spreads down and allow them to tap
financial markets at a reasonable cost.
But economists said they thought it was likely that the mechanism
would need to be triggered in the coming weeks, with Goldman Sachs
estimating that Greece needs E51 billion this year and a further
E104 billion in the period 2011-13.
“The next test is a planned E1.2 billion T-bill auction
tomorrow,” said Colin Ellis, an economist at Daiwa Capital Markets
Europe.
“If that goes well, along with another T-bill sale next week,
Greece is then set to launch a dollar bond, which it hopes will raise
$5-10 billion. Taken together with a rumoured 3-year bond, this should
provide almost all the money needed to get over the financing hump in
May,” Ellis added.
But economists point out that while the immediate liquidity crisis
in the Eurozone may be avoided with this aid package, Greece and several
other Eurozone countries still face huge economic and fiscal challenges
in the coming years.
Ken Wattret, an economist at BNP Paribas said that the cost of
providing support to Greece – which makes up a small portion of overall
Eurozone GDP – is relatively modest.
“The problem, however, is if the financial support needs to spread
to other, larger member states of the eurozone,” Wattret said, pointing
out that Spain contributes five times more to overall Eurozone GDP than
Greece.
“So providing the same scale of assistance to Spain as to Greece,
for example, would require a contribution from Germany,” he said. “This
would be a much bigger obstacle to overcome.”
Spain’s budget deficit is estimated at 11.4% this year, and the
Commission has said it might need extra measures to bring it back to the
3% threshold within three years as pledged.
And Portugal has a deficit of 8.3% this year, which it says it can
cut to 2.8% by 2013.
So while Sunday’s agreement by Eurozone ministers has succeeded in
calming the markets, longer term sustainability issues remain in many
Eurozone countries. Successfully managing those may prove to be an even
larger challenge than resolving the Greek problem.
–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com
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