Cautious welcome for draft EU rescue plan

At an emergency summit in Brussels, EU leaders have finally settled on a debt relief plan for Greece

The proposed bailout plan for Greece was a long time coming but EU leaders finally settled on terms at an emergency summit in Brussels. Market reaction has been positive, and the plan has even been described as a new ‘Marshall Plan’. But caution remains over the fact that the proposals are so far only a first draft, not the full, officially published agreement between all the relevant governments.

Gary Jenkins, head of fixed income at Evolution Securities, says the proposals “all look pretty sensible at first glance”. Interest rates for rescue loans to assisted countries are set at 3.5%, while the maturities have been extended to 15 years from 7.5 years.

Longer maturities for Greece, Ireland and Portugal, combined with lower interest rates are positive for those countries, and probably negative for Bunds, he says. Referring to the ability to buy bonds in the secondary market, he notes that did not do much good when the ECB did it, but maybe there is more commitment now.

Clarification is needed on private sector involvement, he adds. “Does this mean banks only? So, a non-bank holding short dated Greek debt gets repaid on time and in full?” It might still mean a default from the agencies, but that could be a minor inconvenience if private sector involvement is limited to banks.

Clearly, some difficult decisions have been made. A Reuters report claimed the Euro zone leaders were set to give their financial rescue fund sweeping new powers to prevent further contagion, encouraging the idea that the EFSF had been given the powers necessary to manage the crisis effectively.

Hardeep Dogra, portfolio manager on the Schroder ISF Global Managed Currency fund, welcomed the expanded role of the European Financial Stability Facility (EFSF). The Brussels summit draft statement shows the EFSF rescue fund would be allowed, for the first time, to help states earlier with precautionary loans, to recapitalise banks and to intervene in the secondary bond market.

“To improve the effectiveness of the EFSF and address contagion, we agree to increase the flexibility of the EFSF,” according to the draft. These three key steps were all ones that Germany had previously blocked.

However, details are not clear and doubt remains. The draft suggests that the EFSF can only become more active if the ECB declares exceptional circumstances, and suggests that each eurozone member would effectively retain a veto vote on allowing the EFSF to proceed.

The veto issue is not to be brushed off lightly, says Hardeep Dogra, portfolio manager on the Schroder ISF Global Managed Currency fund. It suggests a situation could arise in which intervention is required, but for whatever reason it does not happen.

Another positive, says Dogra, is the suggestion that the EFSF should act as a stabilising mechanism, and that it can act to assist in the recapitalisation of countries not officially part of the support programme – such as Spain. Again, however, he notes that final judgement on the success of today’s meeting should be reserved for the official agreement.

The euro and European stocks, which had fallen on reports of a possible selective default, rallied sharply on news of the draft conclusions. The risk premium investors demand to hold peripheral euro zone government bonds rather than benchmark German Bunds fell.

At 16:26 BST, the FTSE 100 was up 62.06 points or 1.06%, the Dax was up 83.02 or 1.15% and the STOXX 50 was up 59.04 or 2.18%. US stocks rose on reports that European officials had a plan to recapitalize struggling banks, and extended a weekly gain for the Standard & Poor’s 500 Index.

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