MARKETS rallied after Eurozone leaders agreed to a new Greek rescue that will cut the country’s debt by 12 per cent of GDP from its current 140 per cent level and see the EU’s bailout fund given sweeping new powers.
The deal, fronted by French president Nicolas Sarkozy, will also see most private holders of Athens’ debt take a 20 per cent cut in the value of their bonds.
As details emerged, the euro gained one per cent against the greenback between yesterday morning and evening, rising to $1.44 in the afternoon and rising 0.8 per cent against the Swiss franc over the same period.
Relieved investors surged into equities as they concluded that the Eurozone’s collapse is not imminent, with the Eurostoxx 50 closing up 2.1 per cent and the FTSE 100 gaining 0.9 per cent.
Yields on 10-year Greek debt dropped from 17.5 to 16.5 per cent, interest on equivalent Spanish and Italian debt dropped 25 basis points to 5.75 per cent and 5.34 per cent respectively.
However, most observers expect the market cheer to be short-lived as details of the new bailout emerge and doubts persist over both the sustainability of Greece’s debt burden and the more fundamental problem of the Eurozone’s widely diverging competitiveness.
The deal aims to reduce Greece’s private-sector debt burden by €134bn by 2020, confirming that the European Central Bank (ECB) has failed in its bid to avoid imposing any losses on private holders of Greek debt.
Under pressure from a Franco-German alliance, the ECB surrendered on Jean-Claude Trichet’s central tenet – that non-official creditors must not share in the bailout costs.
Greece will be allowed to default, but only “temporarily”, as its debts are transferred over to the European Financial Stability Facility (EFSF), the EU’s €750bn bailout fund. Private creditors will then be paid by the EFSF, whose debt will be underwritten by Greek assets.
However, the net present value of the debts will shrink by around 20 per cent as their maturity is doubled from 7.5 years to 15 and the interest rate on them cut to just 3.5 per cent.
The bailout fund itself will also be given new powers to intervene in sovereign debt markets, taking the task of buying country’s bonds out of the ECB’s hands.
However, the EFSF will only be allowed to buy bonds subject to “analysis” by the ECB, the details of which are unclear.
In addition, the bailout fund will be allowed to make loans to nations in order to recapitalise their banking systems.