Leaders try to allay debt-crisis fears
BRUSSELS — European leaders sought today to convince fearful markets that the Greek debt crisis won’t spread to other countries and derail the continent’s wobbly shared currency and hesitant economic recovery.
France, Italy and Portugal approved their share of a €110 billion ($140 billion) bailout to keep Greece from imminent default as the 16 leaders from countries using the euro headed for an evening summit in Brussels.
Germany’s contribution awaited only a presidential signature, while Spain’s government approved its share by decree with formal parliamentary approval expected next week.
The meeting — initially called to sign off on the bailout and draw lessons for the future — faces the challenge of urgent crisis management, after the euro dropped to its lowest level in 14 months and bond markets dumped Greek debt.
EU leaders have insisted for days the Greek financial implosion was a unique combination of bad management, free spending and statistical cheating that doesn’t apply to any other eurozone nation, such as troubled Spain or Portugal. They said the bailout should contain the problem by giving Greece three years of support and preventing a default when it has to pay €8.5 billion in bonds coming due May 19.
Again Friday, European leaders were almost desperately trying to talk away the problems.
Agreement on rescue for Greece “will be a demonstration of Europe’s force, of solidarity,” French Prime Minister Francois Fillon said after a meeting with Portuguese Prime Minister Jose Socrates. “We will protect Greece and reinforce the stability of the euro zone,” he said.
The markets have taken little heed. Stocks, Greek bonds and the euro plunged even after the head of the European Central Bank, Jean-Claude Trichet, tersely underlined that “Portugal is not Greece. Spain is not Greece” on Thursday. The euro fell to $1.2520, its lowest in 14 months, but recovered to $1.2773 later.
Along with the eurozone meeting, the G-7 finance ministers will hold a teleconference Friday on the crisis, according to Japan’s finance minister.
And on top of the eurozone summit, key leaders like France’s Nicolas Sarkozy, German Chancellor Angela Merkel and Trichet will huddle ahead of time seeking to a common strategy to soothe the markets.
After struggling to get ahead of the crisis for weeks, European governments are now underlining their determination to act by speeding approval of their contributions to the emergency loan package for Athens, hoping to contain the threat to their currency to just one country.
The consequences of failure could be dire. Many economists think Greece will eventually default anyway, which could lead to sharply higher borrowing costs for other indebted countries in Europe. Default, or market contagion to other countries could lead to panic, intimidating consumers from spending and making banks fearful to loan money to businesses and consumers.
In Germany, where bailing Greece out is unpopular, both houses of parliament approved the package Friday and sent it to President Horst Koehler for his signature. With Italy and France, that accounts for over two-thirds of the European part of the bailout package. The International Monetary Funds adds €30 billion on its own.
Even Germany stressed how precarious the situation had become for the whole of Europe.
“The situation is very serious and no one can say that we are already out of the woods with today’s decision,” Foreign Minister Guido Westerwelle said after parliament approved its €22.4 billion ($28.6 billion) slice of the package. “What is important now is that we must extinguish the fire so no brush fire spreads in Europe, and we must at the same time fight the cause of the fire.”
Portugal’s Parliament on Friday approved its share of the bailout — just over €2 billion — for Greece.
Even as Portugal readied to loan to Greece, its own interest rate gap, or spread, between Portuguese and benchmark German 10-year bonds, was ticking higher — a sign that debt fears were infecting market views of Lisbon’s situation.
On Friday it rose nine basis points, or 0.09 percentage point, which means Lisbon would have to pay almost 6.2 percent in interest to borrow on the markets — its highest rate since before joining the euro.
Greek lawmakers approved drastic austerity cuts Thursday worth about €30 billion ($38.18 billion) through 2012 — that will slash pensions and civil servants’ pay and further hike consumer taxes. The measures were a prerequisite needed to secure international rescue loans.
On Friday, Greek borrowing costs hit another record high and shares on the Athens stock exchange were lower amid losses in European markets and fears that Greece will have difficulty implementing its austerity plan. In Portugal, the spread between Portuguese and benchmark German 10-year bonds, meanwhile, ticked higher. On Friday it rose nine basis points, which means Lisbon would have to pay almost 6.2 percent in interest to borrow on the markets — its highest rate since 1997.
In New York, the Dow Jones industrials plunged 1,000 points in less than half an hour on fears that Greece’s debt problems could halt the global economic recovery. The Dow managed to recover two-thirds of its losses and close down 347 at 10,520. European stocks fell but recovered most of their losses by early afternoon Friday.
Fears of Greek default have undermined the euro, and while the current package should keep Greece from immediate bankruptcy, its long-term prospects are unclear. The country’s growth prospects are weak, and the population’s willingness to accept cutbacks may wane, leading some economists to predict an eventual debt restructuring somewhere down the road.
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