Europe's leaders applaud Greek debt deal
Markets echo approval as Germany's Angela Merkel calls new Greek bailout "our historic duty to protect the euro".
Last Modified: 22 Jul 2011 17:29
German Chancellor Merkel described the new $229bn  Greek bailout package as 'worth every effort' [AFP]

European leaders have celebrated a new Greek debt deal that investors greeted with relief and trade unions with doubts over its long-term effectiveness.

France, which had pushed hard to avoid a Greek debt default, said on Friday the new $229bn bailout would stop contagion which could have cost the country "several billions of euros per year" in higher interest rates and loans.

Angela Merkel, the German chancellor, said offering Greece a second bailout was part of "our historic duty to protect the euro."

"What we are spending now for Europe and the euro, we will get back even more," she said. "It is worth every effort."

Spain, which has been battling to convince markets that it will not need a bailout of its own, said the deal would "halt all possibility of contagion" in the rest of the eurozone, while for Portugal, it would "significantly increase" Lisbon's ability to deal with its own debt crisis.

George Papandreou, the Greek prime minister, said the second package had freed the country from "the nightmare of default".

"Our country has achieved historic decisions and Europe took a huge step forward," Papandreou told his ministers, who applauded him as he entered a cabinet meeting on Friday.

"Today we can be proud that we will not leave our children an insurmountable problem because we have rendered our debt problem manageable."

Emergency summit

Eurozone leaders and private creditors agreed at an emergency summit late on Thursday in Brussels to give Greece a new bailout, risking a potential default through its inclusion of the private sector so as to prevent the debt crisis from spreading.

The eurozone and the International Monetary Fund will provide 109bn euros while private-sector banks will share the costs with about 50bn euros up to 2014, a total equivalent to $229bn.

Under the terms of the deal, private creditors who hold Greek debt that matures in the coming years will "voluntarily" turn in their bonds and accept new ones that mature far in the future.

For credit rating agencies, that boils down to a default.

Fitch, the French-US credit-rating agency. led the pack on Friday, the AFP news agency reported, declaring that it would give Greece a selective default credit notation, arguing that the deal amounted to a default on payments on existing debt.

'No real effect'

Evangelos Venizelos, the Greek finance minister, sought to play down the issue on Friday, telling AFP: "Any reaction outside the institutional system, any evaluation, has been answered in advance and has no effect, no real, no monetary-economic effect."

Joshua Raymond, chief market strategist at City Index traders said: "The market is giving the plans the thumbs up but in the long term I think we remain some way off from a high-five."

Analysts at Switzerland-based investment bank UBS said the deal would not be enough on its own to adequately reduce Greece's 350-billion-euro debt load.

"There is no suggestion of a sufficiently dramatic restructuring, and as such a selective default today will eventually have to be superseded by a haircut-based default," UBS said.

Fitch ratings agency said it would consider Greece to be in limited default under the terms of the second eurozone bailout agreed at an emergency Brussels summit.

Banking stocks boosted

European shares rose for a fourth day on Friday after Greece's new rescue package buoyed banking stocks.

Banks, many of which are major holders of Greek and other peripheral euro zone debt, gained sharply, the Reuters news agency reported.

Trading volumes were high and had already reached more than 60 percent of the index's 90-day average. The STOXX Europe 600 Banking Index rose 1.5 per cent, adding to a hefty 4.1 per cent gain in the previous session.

Also on Friday, the Euro STOXX 50 volatility index, Europe's main fear gauge, fell 7.7 per cent, signalling a rise in investor appetite for risk

At day's end the pan-European index was up 4.2 per cent from the 2011 low it hit on Tuesday, but is still down more than 6 per cent from the high of mid-February.

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