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4.12.2010 Europe Bankrolls Greece

By Charles Forelle and Marcus Walker

BRUSSELS—European governments said they were prepared to extend Greece a €30 billion bailout if needed, in an effort to deliver the country from a debt crisis that has rattled markets for months and tested Europe's monetary union.

Finance ministers from the 16-nation euro zone on Sunday agreed Greece could borrow up to €30 billion ($40 billion) by taking three-year loans from fellow members of the currency bloc this year at an interest rate of close to 5%, a rate well below the more than 7% Greece now has to pay on the open market.

In addition, Greece could apply for less-costly loans from the International Monetary Fund that analysts say could reach as much as €15 billion. The IMF's involvement in a potential rescue had been previously agreed among European leaders, a move pushed heavily by Germany, which stands to pay much of the bailout. Asian stocks rose in early trading Monday on news of the rescue package, which also lifted the euro.

Sunday's agreement on the aid package, which was more generous than some had anticipated in both the amount and rate of interest, doesn't mean Greece has ready access to the funds. Before that can happen, all 16 euro-zone countries must agree to activate the aid.

Nevertheless, the deal places Greece within arm's reach of an unprecedented bailout, culminating months of debate over a rescue that has divided Europe.

The announcement "shows that there is money behind" the European Union's previous statements of support, Jean-Claude Juncker, the Luxembourg premier and the head of the council of euro-zone countries, said at a news conference.

Now the question is whether the plan is enough to calm market fears over Greece and prevent its debt woes from spreading to other countries in the euro zone. Greek officials welcomed the package but stressed they haven't formally asked for aid. Prime Minister George Papandreou said his government would use the bailout mechanism only if needed, calling it a "safety net" in an interview with Greek newspaper To Vima.

"The question is whether that mechanism will convince the markets, simply as a gun on the table. If it doesn't convince them, it is a mechanism that exists and can be used," Mr. Papandreou said.

European governments hope that offering the specifics of a bailout will be enough to calm investors who last week sent the euro tumbling and Greece's cost of borrowing to the highest level in more than a decade.

The EU's previous attempts to defuse the Greek crisis in recent weeks with vague promises of aid failed to erase fears that Greece might default.

On March 25, EU leaders signaled they would rescue Greece together with the IMF if such a step became necessary but offered scant detail about how they would do it.

Most Germans oppose extending aid to Greece, and Chancellor Angela Merkel, who faces a key regional election next month, has tried to avoid offering Athens anything more than moral support. The increasing market pressure made that position untenable.

Since EU leaders last pledged general support for Greece two weeks ago, more investors have sold Greek government bonds and other financial assets.

The selloff has worsened in the past week as markets grew worried that Greece's banks, as well as its government, might run short of funds. Greek banks, which suffered an outflow of deposits earlier this year, last week asked for access to state support measures in order to bolster their liquidity.

Greece plans to try to raise €1.2 billion through a treasury-bill auction on Tuesday. A failed auction would likely push Greece toward default and force the EU to intervene, an outcome that euro-zone leaders hope to avoid with Sunday's agreement.

Yet the detailed rescue plan also signals that officials have run out of rhetorical options to deal with the crisis. If the latest promise of aid doesn't end the selloff in Greek debt of recent weeks, other EU nations will almost certainly have to intervene.

Analysts said Sunday's deal would likely lift the pressure from Greece in the short term but that concerns about government debt in other euro-zone countries would likely linger.

The 5% interest rate "is definitely a positive for Greece," said Adam Brown, managing director of U.S. government-bond trading at Barclays Capital in New York.

However, as investors digest the news, worries could grow about what the size of the Greece package implies, said Ian Lyngen, senior government-bond strategist at CRT Capital Group. "If Greece needs that much, what does that mean for other peripheral countries?" he said, a reference to other euro-zone countries running high deficits, such as Spain and Portugal.

The interest rate on the possible euro-zone loans, which is higher than the IMF would charge Greece, reflects the determination of Germany and some other euro-zone governments not to give Greece an easy ride after years of lax fiscal policies that are now creating risks for taxpayers elsewhere in Europe.

Several steps remain before Greece can use the loan package, EU leaders have previously agreed. Greece must first be unable to borrow the money it needs from capital markets. The euro zone still hasn't disclosed officially what circumstances would satisfy that condition. Mr. Juncker said the aid would arrive "if needed."

German officials say a Greek attempt to issue bonds must fail for lack of investor interest before loans would be offered. Euro-zone leaders would have to convene at a special summit and unanimously approve a Greek request to use the rescue.

In parallel, Greece would have to agree a loan arrangement with the IMF, which Germany has insisted on as a condition of euro-zone aid.

Greece has largely made the commitments to fiscal austerity that it needs to secure IMF loans already, during the past weeks of arduous negotiations with the fund and EU authorities, analysts say.

Greece's giant budget deficit, which reached around 13% of gross domestic product last year, and its towering overall public debts have led to intensifying financial-market speculation about a possible debt default. Greece faces two large debt repayments, one this month and one in May, for which it still needs to raise billions of euros.

Last month euro-zone leaders agreed that any bailout for Greece would have to be a last resort only and include loans from the IMF as well as euro-zone countries.

The EU's plan comes with far tougher terms than the IMF's formula for such bailouts. Olli Rehn, the EU's economic commissioner, said the rate for three-year borrowing would be around 5%.

The IMF, by contrast, would charge around 2.7% for up to three years on a €10 billion loan.

"I welcome today's statement on the financial support package that will be provided by Euro area member countries to Greece, when needed, to safeguard financial stability in the euro area as a whole,""The IMF stands ready to join the effort, including through a multi-year stand-by arrangement, to the extent needed and requested by the Greek authorities," IMF Managing Director Dominique Strauss-Kahn said in a statement Sunday.

He said an IMF team will hold talks in Brussels on Monday with the Greek authorities, the European Commission and the European Central Bank.

The interest rate reflects determination in European capitals, especially Berlin, not to give Athens a handout, and to push Greece back towards borrowing from the markets as early as possible.

The figure of around 5%—which is supposed to reflect a Greece's average cost over a period of time of borrowing money from markets at relatively short maturities—is a compromise between Germany, which insisted on lending only at or near market rates, and euro-zone countries that believe Greece's current bond rates are being driven unfairly high by financial-market speculators.

The exact amount of IMF aid remains to be decided, though Mr. Rehn said "in principle" a ratio of two-thirds EU aid to one-third IMF "is the correct magnitude." Messrs. Rehn and Juncker said all euro-zone countries would contribute to the bailout pool, in proportion to their shares in the European Central Bank—roughly a measure of their economic size.

That would include already fiscally strained countries like Spain and Ireland. Mr. Rehn implied such countries, in return for their participation, would get a break from EU authorities when it comes time to measure their debt and deficit against EU-wide limits.

Progress on an EU bailout plan has come in dribs and drabs. First, in mid-February, EU leaders called an emergency summit and announced they'd take "determined and coordinated action, if needed to safeguard financial stability."

A few days later, euro-zone finance ministers said they'd give Greece a month to get its deficit-cutting plan on track.

When that deadline rolled around in March, finance ministers said they'd "clarified the technical modalities" of a Greek bailout, but that none was yet needed and the decision would have to be made by EU leaders.

An EU leaders' summit later in March pronounced that euro members would join with the IMF to lend to Greece if "market financing is insufficient" for the debt-burdened country. The summit left the details undecided, failing to reassure markets as hoped and sparking the renewed sell-off of Greek bonds in the past week.