EU to Set Up Fund to Prevent Spread of Greek Crisis

EU to Set Up Fund to Prevent Spread of Greek Crisis (Update2)

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By James G. Neuger and Gregory Viscusi

May 8 (Bloomberg) -- European leaders agreed to set up anemergency fund to halt the spread of Greece’s fiscal woes,seeking to prevent a sovereign debt crisis from shatteringconfidence in the 11-year-old euro.

Jolted into action by the sliding currency and soaring bondyields in Portugal and Spain, leaders of the 16 euro countriessaid the workings of the financial backstop will be hammered outbefore the markets open on May 10.

“We will defend the euro, whatever it takes,” EuropeanCommission President Jose Barroso told reporters early todayafter the leaders met in Brussels.

Europe’s failure to contain Greece’s fiscal crisistriggered a 4.3 percent drop in the euro this week and led theU.S. and Asia to rally around in a bid to prevent a globalsovereign-debt crisis from pitching the world back into arecession.

European officials declined to disclose the size of thestabilization fund, to be made up of money borrowed by theEuropean Union’s central authorities with guarantees by nationalgovernments. Finance ministers will meet at 4 p.m. tomorrow inBrussels to flesh out the details.

“When the markets re-open Monday, we will have in place amechanism to defend the euro,” French President Nicolas Sarkozysaid. “If you don’t think that’s significant, you haven’t beento many EU summits.”

Independent ECB

Barroso said he wouldn’t push the independent EuropeanCentral Bank to, for example, buy government bonds. ECBPresident Jean-Claude Trichet accelerated the market selloff onMay 6 by rejecting that measure.

With the euro facing its stiffest test since its debut in1999, the summit -- called to discuss longer-term efforts tocoordinate economic policies -- turned into a crisis-managementsession that dragged past midnight.

The euro slid to $1.2715 from $1.3293 during the week, andis down 15 percent since late November. European stocks sank themost in 18 months, with the Stoxx Europe 600 Index tumbling 8.8percent to 237.18.

The extra yield that investors demand to hold Greek,Portuguese and Spanish debt instead of safer German bonds roseto euro-era highs yesterday. The premium on 10-year governmentbonds jumped as high as 973 basis points for Greece, 354 basispoints for Portugal and 173 basis points for Spain.

Spreading Contagion

Europe came under pressure on a hastily arranged conferencecall of Group of Seven finance chiefs yesterday. All agreed on“the need for a clear, timely and strong response,” CanadianFinance Minister Jim Flaherty, who chaired the call, toldreporters in Ottawa. “We hope to see a strong, early policyresponse in Europe.”

The spreading contagion also drew the attention ofPresident Barack Obama, who said in Washington that U.S.regulators will examine the “unusual market activity” that onMay 6 briefly drove the Dow Jones Industrial Average down byalmost 1,000 points, erasing more than $1 trillion in wealthbefore the market bounced back.

“There are impacts on financial markets, including sharemarkets, from the events in Europe and in Greece morespecifically,” said Australian Treasurer Wayne Swan, speakingto reporters in Canberra today. “We are urging as speedy aresolution as is possible in the circumstances.”

In Brussels, German Chancellor Angela Merkel stepped upGerman calls for a closer monitoring of government finances andmore rigorous enforcement of the deficit-limitation rules,originally drafted by Germany in the 1990s.

Europe will send “a very clear signal against those whowant to speculate against the euro,” Merkel said.

Credit-Rating Authority

With the euro region’s overall deficit forecast at 6.6percent of gross domestic product in 2010 and 6.1 percent in2011, the vow to bring budget shortfalls back below the euro’s 3percent limit echoes promises that have been regularly brokenever since governments in 1999 set a three-year deadline forachieving balanced budgets.

Plans for a European credit-rating authority are alreadyunder consideration at the EU Commission, the bloc’s Brussels-based executive agency. It also is investigating whether ratingscompanies such as Standard & Poor’s wield too much power overinvestors’ perceptions of governments.

Asked whether steps to stem speculation against governmentbonds would include restrictions on short sales or creditdefault swaps, Barroso said “some of the points you havementioned will be contemplated.”

The political leadership of the $12 trillion economy alsosigned off on a 110 billion-euro ($140 billion) aid package forGreece negotiated by finance ministers last week. So far ninegovernments have cleared the way for funds to be sent to Athens.

Biggest Contributor

Germany, the biggest contributor with as much as 22.4billion euros over three years, fell in line yesterday withendorsements in the lower and upper houses of parliament. Agroup of German academics filed a lawsuit to try to halt thepayout.

A day after whisking a three-year, 30 billion-euro programof deficit cuts through parliament, Greek Prime Minister GeorgePapandreou ruled out further belt-tightening steps for the timebeing, saying the point of the summit was to “reaffirm ourconfidence in our economies and our common currency and this Ibelieve is a very important message for the global economicrecovery.”

Europe’s unprecedented lending pledge has “proveninsufficient to stop market contagion to the rest of the euro-zone periphery,” Michael Saunders and other economists atCitigroup Inc. said in an e-mailed note before the summit.“Different kinds of solutions are necessary to fix theunderlying problems of the rest of the euro periphery other thanGreek-style packages, and these are unlikely to come in the veryshort term.”

To contact the reporters on this story:James G. Neuger in Brussels at [e-mail];Gregory Viscusi in Brussels at [e-mail].

Last Updated: May 8, 2010 02:04 EDT