–Greece Welcomes Move, Says Still Expects To Fund Needs Via The Markets

BRUSSELS (MNI) – Eurozone countries will make up to E30 billion in
contingency loans available to debt-laden Greece this year, and more in
subsequent years if needed, Eurozone finance ministers agreed after an
emergency teleconference meeting on Sunday.

Euro area finance ministers said the International Monetary Fund
would co-finance the standby package, providing an additional as-yet
undisclosed amount. Another meeting will be held Monday in Brussels to
discuss those details. Eurozone sources said the IMF contribution would
probably be set at somewhere between E10 to E15 billion this year.

That means somewhere between E40 and E45 billion in total funding
could be made available to Greece this year — presumably more than
would be necessary. The country has estimated its total borrowing
requirement this year at E54 billion, but it has already borrowed about
E22 billion of that amount, leaving an estimated E32 billion in
financing needs for the rest of 2010.

Greece quickly asserted that it still planned to fund itself in the
financial markets.

The Eurozone finance ministers’ group, known as the Eurogroup, held
the emergency teleconference today to finalise the terms on which they
would lend to Greece, if such aid were requested.

The southern Mediterranean euro area member is struggling to manage
a soaring deficit, last estimated at 12.7% of GDP for 2009 but expected
to be revised slightly upward. The country faces exorbitant financing
costs in financial markets – more than 400 basis points above the rate
Germany would pay on comparable 10-year bonds.

The bilateral financing from individual EMU states would carry
interest rates dependent on the duration of the loans and whether they
were fixed or variable. A fixed-rate 3-year loan would cost about 5%;
loans of longer maturities would be more expensive. Variable rate loans
would be cheaper.

The urgent Eurozone decision to provide specific details on a Greek
package came after a week in which Greece’s sovereign debt took a
battering in markets, which pushed the country’s cost of 10-year funds
well above 7% and prompted widespread speculation that — at those rates
— default was imminent.

In essence, the Eurogroup was spurred into action by the market’s
savage attack on Greek debt.

“We are now operational if the mechanism has to be activated,”
Eurogroup President Jean-Claude Juncker said in a press conference after
Sunday’s teleconference. But he added that Greece has not yet asked for
support and that “the initiative for activating the mechanism rests with
the Greek government.”

The Greek Finance Ministry welcomed the Eurozone statement
detailing the loan terms, but it made clear that Greece did not intend
to avail itself of the offer.

“We know that the Greek government has not asked for activation of
the [EMU] mechanism despite the fact that it is imminently available,”
the ministry said in a statement. “The goal is, and we believe that we
will continue, to borrow from the markets with no problems.”

The Ministry said that with today’s statement, “the European
Commission and all the Eurozone countries have acknowledged recent
[Greek government] efforts, especially after the first quarter budget
results.” Figures released by the finance ministry last Thursday showed
Greece’s public deficit dropped by 40% y/y in the first quarter.

“Today’s decision is particularly important for Greece and the
Eurozone,” the ministry added. “It is a result of efforts made the past
few months and shows the confidence that our European colleagues now
have in Greece.”

The Eurogroup statement said variable-rate loans to Greece would be
be based on 3-month Euribor, while fixed-rate loans would be based on
the rates corresponding to Euribor swaps for the relevant maturities.

In addition, a charge of 300 basis points would be applied, plus an
additional 100 basis points for amounts outstanding for more than 3
years. Consistent with what the IMF does, a one-off service fee of up to
50 basis points would also be charged to cover operational costs.

“For instance, as of April 9th, for a three year fixed-rate loan
granted to Greece, the rate would be around 5%,” the Eurogroup statement
said.

“It is certainly no subsidy,” said Olli Rehn, Europe’s Commissioner
for Economic and Monetary Affairs, who briefed reporters alongside
Juncker. He was referring to a clause in the Eurozone’s original
agreement on March 25, which said loans to Greece must contain “no
subsidy element.”

That was a condition on which Germany had steadfastly insisted.
However, it appears the loans as described by the Eurogroup are lower
than current market rates, since 3-year Greek yields were running close
to 7% late last week. Of course, whether they are ultimately higher or
lower will depend on which way the market moves following Sunday’s
announcement.

The Greek finance ministry estimated that variable-rate loans would
be less than 4%.

Rehn said the amount contributed by the IMF and the interest rate
on it would be decided by the IMF board, but he said that he thought the
Eurozone interest rates would be “somewhat higher…than the one used by
the IMF.” He added: “We would base [our rate] on the pricing formula
used by the IMF; that’s our benchmark but there are some adjustments.”

Rehn also hinted that the Eurozone loans would make up two-thirds
of the package.

The Commissioner said the EU’s executive arm, the European
Commission, would coordinate the aid. He said another meeting will be
held in Brussels Monday to finalise details of the package and “clarify
everything with the IMF [and] with the Greek government. From our side
the European Central Bank and the Commission will be participating,” he
said.

Juncker said he thought Sunday’s pact would satisfy the markets.

“The decisions of today are of a different nature [to previous
announcements on Greece],” he said. “This time we are laying down the
details of the mechanism to be launched if a Greek request is presented
to the Eurogroup and to the central bank. This is the step of
clarification that the markets are waiting for.”

European Commission President Jose Manuel Barroso said Sunday’s
agreement was “a clear and strong commitment: It shows that the euro
area is serious in doing what is necessary to secure financial stability
and about its commitment to give support to Greece.”

Barroso added: “With today’s agreement, Europe has shown that
responsibility and solidarity can go together.”

–Brussels: 0032 487 (0) 32 803 665, echarlton@marketnews.com

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