Germany Forces Joint Euro / IMF Solution to Greek Debt Crisis

After months of fractious debate, the 16 countries that use the euro agreed on a financial safety net for Greece,

combining bilateral loans from those European nations with cash from the International Monetary Fund.

After months of fractious debate, the 16 countries that use the euro agreed on a financial safety net for Greece,

After months of fractious debate, the 16 countries that use the euro agreed on a financial safety net for Greece,

combining bilateral loans from those European nations with cash from the International Monetary Fund.

After months of fractious debate, the 16 countries that use the euro agreed on a financial safety net for Greece,

combining bilateral loans from those European nations with cash from the International Monetary Fund.

The proposal, brokered by France and Germany and then approved by European leaders on Thursday, would take effect if the Greek government were unable to borrow in the commercial markets. [br]

Under the deal, loans would be provided at market rates and offered only with the agreement of all the nations that use the euro currency.

The accord actually represents a partial retreat for several countries, including France, as well as the European Central Bank,

which had initially rejected the idea of the I.M.F.’s taking part in any bailout in the euro zone.

Still, the agreement represents a breakthrough because Germany has been resisting pressure to give details on how Greece could be rescued if necessary.

Greece had been desperate for a statement, backed by Germany, that explained how a default would be avoided;

it hopes the accord will reduce the high interest rates Athens is being forced to pay as it faces deadlines this year on 54 billion euros ($72 billion) of debt.

Greece’s prime minister, George Papandreou, described the deal as “very satisfactory.”

No rescue is imminent, the document said, and the intervention would only be a last resort. Jean-Claude Trichet, president of the European Central Bank, told reporters that “the mechanism decided today will not normally need to be activated.”…

The deal emerged as the European Central Bank said on Thursday that it would hold off tightening lending rules until 2011, a move that appeared to be intended to help Greek banks in particular.

Mr. Trichet told the European Parliament that the central bank would keep the credit ratings at an exceptionally low level for longer than planned on the collateral that its accepts from banks in return for short-term loans.

Previously, the central bank had said that it would raise the threshold for collateral at the end of 2010. It had been lowered as an extraordinary measure to help banks in the euro zone weather the global credit crisis.

The accord on Thursday reflected the determination of Germany, which is the biggest contributor to the European Union, to insist on tough conditions and strong safeguards.

To suit German demands, the accord says that loans to Greece would “not contain any subsidy element” and would be activated only after a rigorous assessment that all other borrowing options had been exhausted.

This would be undertaken by the European Central Bank but would then have to be approved by all 16 nations using the euro. That gives all participating nations, including Germany, a veto.

Germany also won on a demand for a task force to be completed before the end of the year to identify “all options” on how European Union rules could be tightened to prevent any repetition of the Greek crisis, even if such moves meant amending the bloc’s governing treaty….

Mr. Trichet’s decision earlier on Thursday lifts another cloud hanging over the Greek government.

The prospect of tighter rules was especially worrisome for Greek banks because they hold a lot of Greek government bonds,

whose credit ratings have slipped in recent months because of the country’s deficit woes.

Further downgrades could eventually mean that the bonds might no longer qualify as collateral for Greek banks seeking low-cost liquidity from the central bank.

Usually, Mr. Trichet would hold back such announcements for news conferences after the meeting of the central bank’s governing council.

But with the meeting of European leaders on Thursday night, the central bank may have chosen to send an early signal of support for Greece.

Loredana Federico and Davide Stroppa, economists at UniCredit Research in Milan, called the central bank’s announcement “quite a U-turn.”

Until now, the central bank had been taking incremental steps to remove the generous liquidity measures it put into effect at the start of the global financial crisis.

The bank’s decision should have “positive implications” not only for Greece, they said, but also for other countries under pressure along Europe’s periphery, like Portugal, which was downgraded on Wednesday by Fitch Ratings….

Now, for Greek government bonds to be excluded from European Central Bank operations, they would have to be downgraded five times by Moody’s and three times by Fitch and S.& P., analysts said.

“No doubt the worries about Greek government bonds remaining eligible at the E.C.B. beyond the end of 2010 have played a role in accelerating the decision to modify the framework, which in itself is not surprising,” Laurent Fransolet, an analyst at Barclays Capital in London, wrote in a note to clients.

From the New York Times, March 26 2010