Euro zone nations say bailout program for Greece, others will stabilize markets

Euro zone leaders: Greece plan to stabilize euro

BRUSSELS — A hard-won deal to provide a safety net for Greece provided the debt-ridden country with some welcome relief Friday, with its cost of borrowing on international markets edging down slightly and labor unions at home saying they would hold off on any further strikes — at least for now.

Prime Minister George Papandreou said that while Greece still faced problems, the new plan would give it breathing space to implement his Socialist government’s harsh austerity program, designed to reduce its massive budget deficit and pull Greece out of a financial crisis that has rocked the European Union’s common currency.

Greece’s 12.7 percent deficit for 2009 is four times over the EU limit, pointing to the euro zone’s inability to restrict members’ debt and deficits. Worries of a Greek default also highlighted the lack of a European only safety net for euro zone countries that can’t pay their bills.

“Europe and Greece come out of this crisis much stronger,” Papandreou said. “We know we’re not yet out of the woods. We are on a track of implementing our (austerity plan) and we’re determined to do so. But we have shown… that we have a strong will to take tough, indeed unprecedented measures, to react swiftly to the difficult circumstances.”

The plan agreed on Thursday by the 16 euro zone countries would provide individual loans from other euro zone countries and funding from the International Monetary Fund, in order to rescue Greece if the country found itself unable to borrow or pay its debts.

However, the short text outlining the rescue package — which is short on details — specifies it can only be used as a last resort, and requires unanimous agreement of all euro-zone members.

The agreement was reached after months of European wrangling, notably between Germany, which strongly opposed having to pay to bail out a country that had been overspending for years and consistently falsified its financial statistics, and France, which argued that a euro-zone member should be supported and could not be allowed to sink.

Papandreou insisted he did not believe he would ever have to ask for a rescue.

“We do hope and we believe we will never need to use this mechanism, but the fact that it is there is a very positive signal. Europe is backing us,” he said, adding that the plan’s existence “will allow us in a very calm and organized fashion to implement our program.”

The day after the announcement, the euro recovered from a 10-month low against the U.S. dollar, to $1.3374 in midday trading in Europe from below $1.33 on Thursday. The interest rate gap, or spread, between Greek 10-year bonds and equivalent German issues — a key indicator of market trust — narrowed to 305 basis points from about 330 Thursday. The narrower the spread, the more confidence markets are showing in Greece.

Although the level still translates to roughly twice Germany’s borrowing rate, Athens hopes the bailout plan will reassure markets and eventually lower its cost of borrowing.

Greece needs to borrow some euro54 billion this year, and the country must refinance some euro20 billion in April and May. It has been able to sell bonds but at interest rates it says are not sustainable.

The fact that a safety net is now in place “is also sending a very positive message to the markets that they are backing Greece, Europe is backing Greece, Greece will not have any problem,” Papandreou said, adding that “we will find the opportune time to go out on the market.”

EU Commission President Jose Manuel Barroso echoed the sentiment, saying that “I hope that financial markets will now act on fact and not on fiction.”

The deal also won the Greek government a slight reprieve from labor unions at home, who have staged a series of strikes to protest the austerity plan. Greece’s largest umbrella union, GSEE, said Friday that while it feared a spike in unemployment, it would hold off on staging more strikes to help the government improve public finances.

“We have an appreciation of the situation the country is in … We maintain a realistic and responsible position of readiness,” GSEE spokesman Stathis Anestis told The AP.

However, some analysts remained cautious, noting dangers still lie ahead.

The deal “clearly improves the country’s financial outlook and could also ease some of the near-term pressure on the euro,” said Jonathan Loynes, Chief European Economist at Capital Economics LTD. in London.

“But it would be wrong to think that the crisis is over. For a start, Greece is still going to have to pay a heavy price to meet its financing needs. Any loans would be at market interest rates, which are still very high. And more importantly, Greece still faces an extremely serious economic crisis,” he said, noting that its economy would likely remain “stuck in a deep recession for some years.”

With other euro-zone countries such as Portugal and Ireland also facing long downturns to get out of fiscal trouble, “we suspect that any relief for the euro will be short-lived,” he said.

German Chancellor Angela Merkel, who vociferously had opposed an immediate bailout for Greece, said she was “very satisfied” with the outcome.

“I think that it demonstrated Europe’s capability to handle things and at the same time did something for the stability of the euro and for solidarity with a country that is in difficulty,” Merkel said Friday.

“For us, it is also important in the long term that the euro, which is such a success for peace and unity, remains stable. Yesterday was an important day for the euro,” she said.

Moody’s credit ratings agency, however, said the political divisions among European leaders over how to handle the crisis had already damaged the region’s credibility.

“The key credit question is whether, over the coming weeks and months, market confidence will be strengthened by the support package or whether it will be weakened by contentious conditions under which this package was agreed,” said Pierre Cailleteau, managing director for sovereign risk at Moody’s in London.

French President Nicolas Sarkozy said the euro zone would offer around two-thirds of any loan package with the IMF taking the remaining third.

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Associated Press writers Raf Casert in Brussels and Derek Gatopoulos in Athens contributed to this report.