Greece won some respite from financial market pressure on Tuesday as ratings agency Standard & Poor’s took the country off credit watch for a possible downgrade - a day after euro-zone governments laid out a vague blueprint for possible loans to help the indebted country.
S&P’s announcement that it was no longer considering a downgrade of Greece’s credit rating after it made bigger budget cuts is the strongest sign yet that markets may see less chance of the country failing to repay its debts.
A Greek default would be a serious blow for Europe’s currency union, showing that euro-zone countries are unable or unwilling to lend their own money to one of their members. That’s why markets and many economists expect that European government would step in and stop it with a financial backstop of some sort.
Finance ministers from the 16 nations that use the euro have pledged help - but never laid out firm details or an amount. They said on Tuesday that they’d agreed to bailout Greece with individual loans from each country if it needs it.
Markets gave a lukewarm welcome to the euro-zone pledge, remaining worried about the unclear form and timing of possible aid, but moved higher after the S&P statement.
Jean—Claude Juncker, the head of the euro-zone group, said European Union leaders meeting March 25—26 would make the final decision on the size and the type of financial rescue.
Greece needs to borrow euro54 billion ($74 billion) this year - euro20 billion of that in April and May - but is being forced to pay higher interest rates than more fiscally prudent European nations.
The country’s financial troubles have undermined the shared euro currency and raised fears that other indebted governments may face similar difficulties borrowing money.
European governments have been reluctant to say how they would help Greece, worried about voter anger at using taxpayer money to cover Greece’s budget misdeeds.
While most European finance ministers were tight-lipped about their new mechanism, Dutch Finance Minister Jan—Kees De Jager, gave some details of how the potential bailout - which he called a “safety net” - might work.
Bilateral loans from other governments would be on a voluntary basis, but EU leaders could also decide on a euro-zone initiative, he said.
In that case, the contribution of each country would be based on their share in European Central Bank capital, a calculation based on population and share of gross domestic product.
That could leave Germany shouldering around 27 percent of the burden, France 20 percent, Italy 17.9 percent, and 5.7 percent for the Netherlands.
“There is now talk of an instrument with such tough conditions that you cannot talk of a bailout,” said Mr. De Jager.
A Tuesday euro-zone statement said any loans would not charge “favourable” interest rates. This is an effort to discourage a country from seeking a bailout - and getting it to return quickly to borrowing from bond markets.
Greek Finance Minister George Papaconstantinou, welcomed the support, although he stressed Greece has not asked for financial help and is only seeking “political support in order to have access to markets at reasonable borrowing rates.”
During a visit to Hungary, Greek Prime Minister George Papandreou, said that the decision by euro-zone finance ministers is a “step forward” - but he said “we have not reached closure” which must wait for the leaders meeting.
Greece has warned that its budget problems will worsen unless interest rates come down - and the euro-zone pledge of help is one way of trying to convince markets that they should charge less for Greek debt.
German Finance Minister Wolfgang Schaeuble, also talked down a bailout, telling the German parliament that no final decision has been made.
Tuesday’s market reaction showed investors remain cautious as long as the details are not ironed out. Ben May, European economist at Capital Economics, said “explicit support could still be some way off.”
In a bid to soothe investors, Greece has announced painful tax increases and spending cuts to squeeze its budget and save another euro4.8 billion this year, including public sector wage cuts that angered unions and sparked two nationwide strikes last week.
