INITIAL City enthusiasm over an expected bailout for Greece quickly switched to disappointment yesterday as the 16 nations in the eurozone failed to come up with a solid rescue plan.
The euro plunged almost one per cent against the dollar – at one stage breaching a fresh eight-month low –?and despite recovering slightly lost most of the gains it had made in the run-up to the Brussels meeting of the 27 EU leaders yesterday.
Herman van Rompuy, the EU’s president, described the deal as a “political statement” saying leaders had not come up with a detailed rescue package because Greece had not asked for assistance.
“One thing the market doesn’t like is uncertainty, and a lack of detail from the EU on Greece’s problems is having a telling effect on stocks,” said Manoj Ladwa, a senior trader at ETX Capital.
EU leaders said they stand ready to shore up Greece’s finances and ensure stability in the eurozone – but failed to spell out what they meant by “determined and co-ordinated action, if needed”.
German chancellor Angela Merkel said the EU was showing it stood “shoulder to shoulder” with Greece in its time of trouble. “The best solution without any doubt is that Greece meets its obligations and that the markets believe these commitments will be implemented,” Merkel said. She added Greece “will not be left on its own, but there are rules and these rules must be adhered to.”
The German foreign minister, Guido Westerwelle, said there will be “no blank cheques” for Greece.
Prime Minister Gordon Brown stressed that “the discussions at the moment are within the euro area,” when asked if the UK would contribute to any EU aid.
EU leaders and Greece agreed yesterday that the latter needs to reduce its budget deficit by four per cent this year. At 12.7 per cent of GDP, it is more than four times higher than eurozone rules allow.
Possible EU measures include eurozone-weighted contributions to a support package, using eurozone state banks as a vehicle to purchase Greek government bonds or setting up a contingency loan facility, said David Page at Investec.
One solution would be to guarantee Greek debt, at nearly zero cost to other countries.
“This would guarantee demand for Greek bonds and bring down credit spreads, but falls foul of Maastricht criteria. Greece would be able to finance itself through this year relatively easily,” he said.
“Any support is going to be deeply unpopular, particularly among French and German taxpayers and the Irish who didn’t receive any support,”?he added.
Adding to its woes, Greece’s unemployment rate increased to 10.6 per cent in November.
Meanwhile, Greek government bond yields reduced an initial large drop as markets absorbed details of the eurozone’s bailout plans. Having at one stage breached 5.75 per cent , the yield on the 10-year bond was later trading down just five basis points at 5.95 per cent.