Greek bailout boosts global markets

Financial markets have welcomed the long-awaited rescue package for Greece and the strengthening of the eurozone’s bailout fund.

The €109bn (£95bn) bailout deal for Greece, which was hammered out at an emergency summit of eurozone leaders in Brussels on Thursday night, sent the euro and shares rallying across Europe on Friday. The value of government debt in crisis-hit Greece, Spain and Italy rose for a second day.

Banking stocks, which have recently been battered by the eurozone debt crisis, were among the top risers, amid relief that a bank levy was off the table, at least for now.

“It is encouraging they have come up with something and dealt with some of the restructuring,” said Louise Cooper, markets analyst at BGC Partners. “The markets have got excited about it. But the cuts to Greek debt do not put the country on a sustainable footing for growth and do not take us where we want to be.”

Markets shrugged off an announcement from Fitch, the ratings agency, that it would assign a “selective default” to Greece, on a temporary basis.

As part of the deal, the eurozone’s €440bn rescue fund established in May last year, known as European Financial Stability Facility (EFSF), will be given broader powers to help prevent the debt crisis spreading to Italy and Spain. The package agreed after weeks of bad-tempered, intense haggling, was the most radical action from the eurozone since it created the bailout fund. Currently the fund can only be used as a “last resort” to rescue a eurozone country whose plight jeopardises the stability of the euro as a whole.

Under the 16-point blueprint agreed on Thursday night, the fund will be able to intervene on the secondary markets to buy up the bonds of struggling debtor countries from private investors. It can also take preemptive or “precautionary” action to nip a debt crisis in the bud by, for example, agreeing lines of credit, and supply loans to struggling eurozone countries who would use the money to shore up and recapitalise their banks. Such aid would apply, unlike at present, to countries not already in bailout programmes.

The package will also allow Greece to roll over maturing debt and pay a lower interest rate on its bailout loans. The banking sector will exchange and roll over €54bn of Greek debt, with private investors taking a haircut worth 21% of the market value of their debts.

Lacking detail

Economists at Barclays Capital said the summit results were “more than expected but not enough to make us sleep comfortably”. “The official statement lacks detail in key areas such as private sector involvement for Greece and collateral requirements. Also, the envisaged reforms of the EFSF lack detail and we are struck that, given the additional tasks envisaged for the EFSF, the size of the EFSF is not even discussed in the document.”

The euro rallied to a two-week high against the dollar, hitting $1.4440 before steadying around $1.4409. The FTSE 100 index in London climbed nearly 40 points to 5938, a gain of 0.65%, with insurers Aviva and Legal & General and banks Barclays and Royal Bank of Scotland leading the gains. Spain’s Ibex and Italy’s FTSE MIB index gained nearly 1%. The yield, or interest rate, on government bonds fell in Greece, Spain, Italy and Portugal.

Gary Jenkins, head of fixed income research at Evolution Securities, said: “We questioned whether the proposals agreed in the euro area leaders’ summit would go down as the day they saved the eurozone and took the first steps towards a fiscal union or whether it would be the traditional short-term sugar rush proposal which does not stand up to scrutiny or the test of time … It might actually be somewhere in between.”

“The proposals were slightly better than expected but maybe not good enough to take away the possibility of further contagion if the economic situation deteriorates. They did take Greece off the naughty step, put their arms around them and basically said ‘take your time, pay us back whenever you can’. By extending maturities and reducing interest rates they have certainly given more support to Greece, Ireland and Portugal.”

Irish cheer

The new deal has been greeted with a mixture of enthusiasm and relief in Ireland and is seen as a vital lifeline at a time when the country was staring at least three more years of austerity and little room for domestic growth.

Alan McQuaid, chief economist at Bloxham stockbrokers said: “In terms of the overall deal, the markets are still not too sure how things are going to play out but I think for Ireland the view is that it is a good step.

“The issue now is to try and convince people that we can grow. The markets think you can have fiscal austerity and growth running along in parallel but you can’t. This will now create some room for growth and Ireland has potential for that uplift,” said McQuaid.

The deal is being painted as a political victory for the Taoiseach Enda Kenny because he has now got what he promised Irish voters when he went to the polls in February – a cut in the bailout interest rate, a renegotiation of the term of the loans and the preservation of Ireland’s controversially low 12.5% corporate tax rate.

Kenny’s popularity had already risen to a record high of 53% after a virulent attack earlier this week on the Vatican over clerical abuse and subsequent cover ups.

“He is now beyond walking on water, he’s walking up there in the clouds somewhere,” said one government source.