–But Greece Gets Lower Interest Rate; Extended Maturities On Aid Loans
–EFSF And Successor Agency To Get Very Limited Bond Buying Authority
BRUSSELS (MNI) – Eurozone leaders ended their special summit here
in the wee hours of Saturday morning and emerged to announce that they
had agreed on the general principals of a new “Pact for the Euro.”
But their agreement will not bring great satisfaction to the
European Central Bank, or to Ireland — which, at least for now, will
not get interest rate relief on aid loans from its European partners.
In a move that was not expected, the leaders agreed to authorize
both the European Financial Stability Facility and its proposed
successor, the European Stability Mechanism, to purchase sovereign bonds
in the primary market — but only as “an exception” and only from
countries that enter into bailout agreements with policy conditions
attached. The EFSF and ESM will not be allowed to purchase debt on the
secondary market, however.
That is sure to disappoint the ECB, which has been lobbying hard
for the political leadership to allow secondary market bond purchases by
both the temporary and permanent bailout funds, thus relieving the
burden on the central bank, which has been doing just that — arguably
at the expense of a healthy balance sheet — for the past ten months.
A weary Trichet did not seem exactly enraptured by the summit
decision when he spoke to reporters in the dark hours of pre-dawn on
Saturday. The leaders’ agreement, he said rather lukewarmly, “goes in
the right direction.” That can only be read to mean that it does not go
far enough.
The Eurozone leaders also agreed to increase the effective lending
capacity of the EFSF to its full E440 billion, primarily by increasing
guarantees to maintain the fund’s AAA rating. The successor to the EFSF,
the European Stability Mechanism, will be allowed to lend up to E500 to
bail out EMU members. But those figures had been widely expected and did
not break new ground.
Perhaps of greater significance is that the meeting Friday night
seemed to be marred by a dispute between the new Prime Minister of
Ireland, Enda Kenny, and his Eurozone peers. The other euro area leaders
wanted Ireland to accept harmonization of corporate taxes — a move
anathema to Dublin, whose extremely low tax rate was a major factor in
its economic boom before the crisis and could help attract new
investment as the country recovers.
Ireland’s reluctance on that issue did not go down well with the
others. So they refused to offer Dublin a reduction of 100 basis points
in the interest rate on its aid loans, even while establishing the
general principle of lowering rates by that amount on bailout loans in
the future and agreeing to offer Greece precisely that benefit on the
loans it has already taken. The maturities on the Greek loans were also
extended to 7.5 years, matching Ireland’s.
“Other members shouldn’t be asked to bailout Ireland when it has
the tax that is the lowest in Europe,” France’s President Nicolas
Sarkozy complained. “We have all had to tighten our belts and make
efforts. And these efforts, in some way or another, Ireland is going to
have to come to terms with.”
Germany’s Chancellor Angela Merkel was somewhat more conciliatory,
even while making clear that she expected Ireland to show some
flexibility on the issue. “I think it is honest and fair to say we can
only give our commitment when we’ve received something in return. The
[Irish] prime minister has accepted this, and we’re going to come back
to him,” Merkel said. She added: “I think Ireland ought to have that
reduction of those 100 basis points as well.”
By contrast, the leaders lauded new fiscal measures unveiled
earlier Friday by Portugal, whose Prime Minister, Jose Socrates, made a
detailed presentation at the summit meeting.
“All member states of the Eurozone expressed their support for the
effective, courageous, bold decisions that Portugal has taken,” Sarkozy
said. “We have truly patted them on the back for what they have done.”
On the broader issues of governance, competitiveness and fiscal
discipline, the new “Pact for the Euro” contains no specific policy
prescriptions, but rather a series of common goals. The leaders said
their pact was predicated upon three “pillars”: sustainable public
budgets, improved competitiveness, and stable financial systems.
European Council President Herman Van Rompuy acknowledged that
those goals “may sound familiar.” However, “what has changed is the
political committment,” he said. This new commitment, he asserted, will
create “strong peer pressure” to ensure the goals are reached.
But in the end, reaching them will depend on the political will of
each individual member state — hardly a sea change in the way of doing
business.
“The approach is not a ‘one size fits all,'” Van Rompuy said. “It
takes into account country specific factors. We will agree on common
targets and member states will be free in the choice of the means, in
full respect of their tradition.”
The measures agreed on late Friday, to be fully fleshed out by all
27 leaders of the European Union at a summit on March 24-25, will allow
the Eurozone “to finally turn the corner” on the sovereign debt crisis,
Van Rompuy claimed.
However, initial comments from analysts over the weekend indicate
that the “Pact for the Euro” is likely to be greeted by markets with
some degree of skepticism. But the Eurozone leaders put their most
optimistic spin on it.
“It’s a big step forward. It’s going to allow us to integrate our
economic policies,” Sarkozy asserted.
Merkel said, “the basic thrust has been made clear today, and a
course has been charted. And this was only possible because of the
desire of all the countries to move in the appropriate direction.”
–Paris newsroom, +331-42-71-55-40; paris@marketnews.com
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