MARKET REACTION:EUROPEAN MARKETS rebounded yesterday as investors welcomed emerging details of an agreement by euro zone leaders on a second bailout for debt-stricken Greece.
Despite early indications that a solution might see Greece slip into temporary default, stocks rallied in the afternoon, while the euro rose and the bonds of peripheral nations also secured gains.
The euro rose as high as $1.4401 against the dollar, having sunk to a session low of $1.4137 earlier in the day, as investors welcomed the menu of options announced by European leaders.
This includes sweeping changes to the European Financial Stability Facility (EFSF), with a new flexibility to help resolve debt problems in other peripheral states, including Ireland.
Leaders agreed to support a second Greek programme totalling €109 billion.
The fresh funding comes with longer loan maturities and lower interest rates than in the original package, new terms which would also apply in the future to Ireland and Portugal.
The rate on fresh EFSF loans would be “close to, without going below, the EFSF funding cost”, currently 3.5 per cent. Leaders confirmed that Greece would receive loans with a minimum maturity of 15 years, double the current length, with the interest cut from between 4.5 and 5.8 per cent.
The FTSE closed up 0.8 per cent, driven upwards by gains for financial stocks, while the Iseq finished the day up 0.6 per cent.
The ECB had warned that anything but voluntary default could cause difficulties on the bond markets for larger European economies, exacerbating the crisis. Thus warnings early yesterday that a selective default by Greece “could not be excluded” prompted a nervous plunge by the euro and European equities.
But markets recovered in the afternoon and the bonds of the peripheral states, including Ireland, rose in tandem with the more optimistic mood.
The yield on 10-year Irish debt fell 70 basis points to 12.35 per cent.
European leaders insisted that a “selective default” by Greece would not cause problems on bond markets for larger European states like Italy and Spain, emphasising that Greece was “in a uniquely grave situation” in the euro zone.
The debt rollover, bond buyback and bond exchange options that will be made available to Greece, apparently with the support of the financial sector, are “an exceptional solution”, the statement stresses.
The statement notes all euro area member states will agree to strictly adhere to fiscal targets and structural economic reforms.
Leaders welcomed recent austerity measures announced by Italy and Spain and welcomed progress on reforms in Portugal and Ireland, paying special attention to Dublin’s commitments to a process of EU tax reform.
“We note Ireland’s willingness to participate constructively in the discussions on the Common Consolidated Corporate Tax Base draft directive (CCTB) and in the structured discussions on tax policy issues.”
In future, a revised EFSF would be able to intervene in the euro zone, if “adequate conditionality” is provided.
Through loans to governments – open even to those not currently receiving funding – the upgraded EFSF could recapitalise financial institutions.
In addition, the revised fund could intervene on secondary financial markets – but only on foot of a unanimous vote by EFSF members and following an ECB confirmation of “exceptional circumstances”.
Looking forward, the leaders anticipate further proposals to boost the stability and growth pact, macro economic surveillance and, by the end of 2012, “legally binding, national fiscal frameworks”.
