The Government will participate in the provision of bilateral loans to Greece after the leaders of the 16 euro zone countries struck a deal last night to provide an emergency rescue net to the heavily-indebted country.
The agreement came late last night as German chancellor Angela Merkel set aside her reservations over last-resort support for the Greek government, which faces a crucial test next month when it tries to raise some €20 billion in debt.
The EU deal would see euro zone governments and the International Monetary Fund (IMF) extending credit to Greece if it was unable to meet its funding requirements on the international markets. Euro zone governments would provide most of the loans to meet any funding shortfall – possibly on a 3:2 ratio – in an effort to ensure primacy of EU governance rules over the aid framework.
The agreement does not set out any loan quantum, which would be determined according to Greece’s need. However, some informed sources have speculated that as much as €25 billion might be required if Greece failed to raise money from the market.
“The firm hope in concocting this is that it will not be used,” a senior diplomat said. Although the scheme is voluntary, the diplomat said the clear understanding was that all euro zone members would assist in the provision of loans.
In the interests of solidarity, an informed source said the Government was prepared to take part in the initiative. The State’s share of any loan package would be 1.64 per cent, in line with its shareholding in the capital of the European Central Bank. However, the source said the Government would extend loans only if it was satisfied that it was not incurring any financial loss on the transaction.
This is in keeping with principles set out yesterday by Taoiseach Brian Cowen, who said yesterday that Athens would have to pay a higher interest rate than the rate the Government itself pays for its borrowings.
The deal represents the culmination of weeks of pressure on the euro as Greece sought to convince its European partners that agreement on a rescue net would ease its borrowing costs. The cost of insuring Greek debt against default fell on news of the agreement and the premium investors charge for holding Greek bonds narrowed, although it still remained significantly higher than other heavily indebted members of the single currency.
The rescue scheme would be coordinated by the European Commission, whose president Jose Manuel Barroso campaigned this week to persuade Dr Merkel to change her stance. The breakthrough came yesterday at an hour-long meeting between the chancellor and the French president Nicolas Sarkozy.
Still at issue late last night was whether stronger surveillance rules that Dr Merkel wants to introduce would require any change in the European treaties, as Dr Merkel has suggested. Mr Sarkozy does not agree.
Mr Cowen expressed doubt about the extent to which that a call for treaty changes might find support around the leaders’ table. “For my part I don’t know to what extent there is support across the union for treaty change as being a necessary element,” he told reporters.
The summit set up a review group chaired by European Council president Herman Van Rompuy to report on the matter to EU leaders by the end of the year. While draft statement referred to a strengthening of “economic government” in the EU, a senior diplomat said there was some discussion around changing the term to “economic governance”.
Asked whether the Greek crisis would lead to greater integration in the euro zone, Mr Cowen said that was “always an issue for further discussion”.
Greek prime minister George Papandreou has argued for weeks that agreement on the mechanism would ease his borrowing costs even if he never asks for aid specifically. While he has repeatedly asked for support, he has not sought actual financial assistance.
“Greece is determined to deal with its own problems, put its own house in order,” Mr Papandreou said in Brussels. “We have already ... embarked on a journey of major radical reform.” His administration received a fillip yesterday when the European Central Bank (ECB) agreed to extend a loosening of its collateral rules, which was due to expire this year. This means Greek bonds will continue to qualify as collateral for ECB liquidity, averting the threat of yet more financial pressure as Mr Papandreou faces into a crucial refinancing process.
A diplomatic source suggested the deal may kick for touch on that question, highlighting the need for further talks later this year.
In the German parliament yesterday morning, Dr Merkel indicated she would accept a contingency plan on condition that the IMF was involved and that her EU partners agreed to toughen the union’s budget deficit rules.
