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Tags: EU | Europe | Financial | Crisis

Markets Back European Debt Crisis Deal for Now

Monday, 14 March 2011 01:22 PM EDT

Greece was the big winner in the markets Monday after the EU agreed to a surprisingly broad package of measures to tackle the debt crisis that has for over a year threatened the existence of the euro currency.

On the weekend, eurozone leaders increased the size of the bailout fund and revealed it can be used to buy bonds directly from governments in exceptional circumstances, but only if they agree to further austerity measures. They also eased the bailout terms for Greece, significantly brightening its financial outlook.

The deal took markets by surprise, especially as German Chancellor Angela Merkel had been sounding an increasingly strident tone against paying up for profligate governments.

Though analysts said the deal doesn't mean the crisis has come to an end — the governments in the so-called "periphery" have years and years of austerity ahead of them — the hope in the markets is that the EU is better prepared to deal with another debt crisis flare-up.

"Our first reaction to this weekend's decisions is a cautiously positive one, yet, in line with our long held view they do not constitute a silver bullet that will end the sovereign debt crisis once and for all," said Elga Bartsch, chief European economist at Morgan Stanley.

The euro rose 0.1 percent on the day to $1.3947, though its gains were capped by global markets' volatile reaction to Japan's massive earthquake, while bond and stock prices rallied.

By mid-afternoon London time, the ten-year yield on Spanish government bonds was down 0.15 percentage point to 5.28 percent, while Portugal's was 0.17 percentage point lower at 7.43 percent.

Greece was the standout performer — its yield slumped a massive 0.46 percentage pints to 12.35 percent after Prime Minister George Papandreou managed to negotiate a 1 percentage point decrease in the country's bailout loan interest rate and an almost doubling of the repayment period to 7 1/2 years.

In stock markets, Greece's main index spiked 5.3 percent, Spain's was up 0.8 percent, and Portugal's rose 1.4 percent.

Greece's easier bailout terms give it more breathing space to manage its mountain of debt, though whether it does anything more than delay an inevitable default remains open to question.

"While this is a clear relief for Greece and will reduce some of the pressure on the sovereign, it is unlikely to make the market more comfortable with the stock of debt," said Jacques Cailloux, chief European economist at Royal Bank of Scotland.

The positive impact of the EU deal on Portugal and Spain was less direct. Though Portugal was helped by the prospect that the bailout fund could buy its bonds on the open market, the country could still end up requiring a rescue — after all, its benchmark bond yield remains above the 7 percent that the government has said will be unsustainable in the long run.

One place where there was far less euphoria was Ireland, whose government did not get a similar deal to that of Greece because it refused to increase its super-low corporate tax rate. The low corporate tax effectively siphons off business from other euro countries by offering a low-cost environment for multinational corporations.

Ireland's borrowing costs dropped far less dramatically and its stock market declined on Monday.

Michael Noonan, Ireland's new finance minister, defended the government's position, arguing that higher corporate taxes would hurt manufacturing and exports, making it even harder for Ireland to repay its massive debts.

"We see export-led growth as the tool to recovery and obviously the tax regime that we apply in Ireland underpins that sector of the economy," Noonan said as he arrived in Brussels for a monthly meeting of eurozone finance ministers.

He also emphasized that Saturday's EU deal did not address Ireland's banking problem, the issue that triggered the country's financial crisis.

The results of special stress test on Ireland's banks due at the end of the month will likely reveal capital holes that go beyond the 10 billion euros that were foreseen for initial bank recapitalizations in the country's 67.5 billion euro bailout deal, Noonan said.

"Affordability isn't so much the issue as sustainability and as so long as it continues to be seen as part of sovereign debt rather than distinct bank debt there remains a problem," he told reporters.

Finance ministers meeting in Brussels Monday and Tuesday will have to work out the details of the broad deal leaders nailed down Saturday.

"A lot remains to be done," said German Finance Minister Wolfgang Schaeuble. EU leaders plan to present their "comprehensive solution" to the debt crisis at their next summit on March 24-25.

© Copyright 2023 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Greece was the big winner in the markets Monday after the EU agreed to a surprisingly broad package of measures to tackle the debt crisis that has for over a year threatened the existence of the euro currency.On the weekend, eurozone leaders increased the size of the...
Monday, 14 March 2011 01:22 PM
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