By CHRIS GRAEME chris.graeme@theresidentgroup.com
In a bid to calm the international financial markets and prevent Greek contagion spreading to Portugal, Spain, Ireland and Italy, the European Union has agreed to float a 500 billion euro life raft to buoy up the currency.
The package, whose final decision was announced on Monday, was suggested over the weekend by Germany to help countries in financial difficulty and avoid the kind of situation which happened in Greece earlier this month.
The lifeline was just one of the ideas under discussion between European Union Finance Ministers, who held an emergency meeting in Brussels on Sunday afternoon to hammer out a deal put forward by 16 Euroland government heads of state to create a stability mechanism for the Euro against speculators.
According to news filtering through on Monday, the deal on the table consists of 440 billion euros from EU member states and a further 60 billion euros from the EU Community Budget added to 100 million Euros from the International Monetary Fund.
The strategy aims to provide liquidity to EU countries that are having difficulties raising funds on the international money markets at reasonable prices to refinance their respective public debts.
The German idea appears to be a variation of the European Commission’s original proposal back in the early spring: Brussels would be authorised to take out loans on the international markets on behalf of Eurozone members with the billions in the EU Community Fund acting as a loan guarantee.
In other words, it would be like an individual going to the bank to take out a loan and using a wealthy patron to stand guarantor for that loan.
Low interest rates will be offered to countries, like Portugal, that are facing particular difficulties in getting finance on the international financial markets.
In exchange for this ‘guarantee’ and low interest rates, countries in difficulty will have to show that they are tightening their belts through austerity measures aimed at restoring fiscal stability and market confidence.
This model has already been on the table for discussion since April in the specific case of Greece, but was later shelved on the insistence of Germany. That prevarication led to Greece narrowly becoming bankrupt.
Instead, a mechanism of bi-lateral loans was put in place with 110 billion euros from 16 countries (80 billion from the EU and 30 billion from the IMF), which will be made available in the next few days.
Meanwhile, José Sócrates has come under strong pressure from French President Nicolas Sarkozy to quickly take additional budgetary measures to reduce Portugal’s 9.3 per cent budget deficit in order to regain credibility from international financial ratings agencies.
Sarkozy met successively with both Sócrates and the Spanish Prime Minister, José Luís Rodriguez Zapatero, and told both that they had to “take extraordinary measures now”.
Last week hundreds of millions were wiped off the Lisbon Stock Market after the US ratings agency Moody’s admitted that it was considering cutting Portugal and Spain’s credit rating by two points within three months if additional budgetary constraints weren’t introduced.
The interest rates that international investors are now demanding in return for buying Portuguese 10-year government bonds soared to 6.21 per cent while spread margins climbed 329.7 points – the highest since Portugal joined the Euro.
