Eurozone ministers accede Greece set to default
Source: Agencies |
July 13, 2011, Wednesday
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Print Edition
Print Edition
THE eurozone acknowledged for the first time some form of Greek default may be needed to cut Athens' debts, but markets seized on the lack of a deadline for action and a lukewarm response from the IMF to heap pressure on Italy and Spain.
Dutch Finance Minister Jan Kees de Jager said yesterday eurozone finance ministers had effectively accepted that if they wanted to involve the private sector in a second Greek bailout, a selective debt default was likely, despite the European Central Bank's vehement opposition to such a move.
"We have managed to break the knot, a very difficult knot," he said as he arrived for the second day of talks.
Asked about whether a selective default was now likely, he replied: "It is not excluded any more. Obviously the European Central Bank has stated in the statement that it did stick to its position, but the 17 (eurozone) ministers did not exclude it any more so we have more options, a broader scope." Participants said both a buyback of Greek debt on the secondary market and a German proposal for a bond swap for longer maturities were under consideration after a complex French plan to roll over bonds made no headway.
Both would likely be regarded by ratings agencies as a default, or at best a selective default, which could have profound repercussions for financial markets.
The lack of immediate action and the increased likelihood of some form of default sent European bank stocks and debt markets into a spin and propelled the euro sharply lower against the dollar.
The cost of insuring against a default in Spain, Portugal and Greece hit a record high and 10-year bond yields in Italy, the eurozone's third-largest economy, shot above 6 percent for the first time since 1997, well above the level which bankers say will put heavy pressure on finances.
There is now acute concern about contagion to Italy, where political tensions between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti have exacerbated concerns, and to Spain, the eurozone's fourth largest economy.
"Euro area politicians and especially Germany have inadvertently transformed a modest periphery crisis into a euro-wide crisis as conflicting views and slow-footedness foster a lack of confidence," Lloyds Bank strategists said in a report. The euro fell to a four-month low against the dollar in part because IMF Managing Director Christine Lagarde said the lender and its EU partners were not yet ready to discuss terms for a second Greek bailout.
"Nothing should be taken for granted," she told reporters in Washington. While the finance ministers were not explicit about how they planned to tackle Greece's debt, saying only that proposals would be discussed "shortly," they acknowledged that the debt pile - which stands at around 160 percent of GDP and is unsustainable at that level - had to be reduced.
"We stress the need to make Greek debt more sustainable," Jean-Claude Juncker, the chairman of the Eurogroup, told reporters after more than eight hours of talks on Monday.
Economists regarded Juncker's words and the comments from other finance ministers as a fundamental shift, although it remains unclear what specific steps will be taken.
"Greece will need debt relief at some point, but it is not clear it is much of a help now. More likely the shift towards debt relief is intended as an attempt to limit contagion," JP Morgan economist David Mackie wrote in a research note.
Dutch Finance Minister Jan Kees de Jager said yesterday eurozone finance ministers had effectively accepted that if they wanted to involve the private sector in a second Greek bailout, a selective debt default was likely, despite the European Central Bank's vehement opposition to such a move.
"We have managed to break the knot, a very difficult knot," he said as he arrived for the second day of talks.
Asked about whether a selective default was now likely, he replied: "It is not excluded any more. Obviously the European Central Bank has stated in the statement that it did stick to its position, but the 17 (eurozone) ministers did not exclude it any more so we have more options, a broader scope." Participants said both a buyback of Greek debt on the secondary market and a German proposal for a bond swap for longer maturities were under consideration after a complex French plan to roll over bonds made no headway.
Both would likely be regarded by ratings agencies as a default, or at best a selective default, which could have profound repercussions for financial markets.
The lack of immediate action and the increased likelihood of some form of default sent European bank stocks and debt markets into a spin and propelled the euro sharply lower against the dollar.
The cost of insuring against a default in Spain, Portugal and Greece hit a record high and 10-year bond yields in Italy, the eurozone's third-largest economy, shot above 6 percent for the first time since 1997, well above the level which bankers say will put heavy pressure on finances.
There is now acute concern about contagion to Italy, where political tensions between Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti have exacerbated concerns, and to Spain, the eurozone's fourth largest economy.
"Euro area politicians and especially Germany have inadvertently transformed a modest periphery crisis into a euro-wide crisis as conflicting views and slow-footedness foster a lack of confidence," Lloyds Bank strategists said in a report. The euro fell to a four-month low against the dollar in part because IMF Managing Director Christine Lagarde said the lender and its EU partners were not yet ready to discuss terms for a second Greek bailout.
"Nothing should be taken for granted," she told reporters in Washington. While the finance ministers were not explicit about how they planned to tackle Greece's debt, saying only that proposals would be discussed "shortly," they acknowledged that the debt pile - which stands at around 160 percent of GDP and is unsustainable at that level - had to be reduced.
"We stress the need to make Greek debt more sustainable," Jean-Claude Juncker, the chairman of the Eurogroup, told reporters after more than eight hours of talks on Monday.
Economists regarded Juncker's words and the comments from other finance ministers as a fundamental shift, although it remains unclear what specific steps will be taken.
"Greece will need debt relief at some point, but it is not clear it is much of a help now. More likely the shift towards debt relief is intended as an attempt to limit contagion," JP Morgan economist David Mackie wrote in a research note.
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