Greece’s borrowing costs dipped on Monday in positive early market reaction after euro-zone countries filled in key details of their financial backstop aimed at quelling fears the heavily indebted country could default.
On Sunday, euro-zone governments said they would make euro30 billion ($40 billion) in loans available to Greece this year if Athens asks for the money, while the International Monetary Fund would contribute about another euro10 billion.
The finance ministers of the 16 euro-zone nations also agreed on a three-year financing formula that would mean a fixed interest rate of “around 5 percent,” while the variable rate would be around 4 percent, officials said.
The rate is still above what IMF aid recipients usually pay, translating into a borrowing cost for Greece that is about twice that of Germany’s.
But the downward trend in Greek borrowing costs as markets opened Monday will lead to relief in Athens, which has said it cannot go on paying the even higher interest rates demanded by jittery bond investors to loan the country money.
The hope is that the mere fact the loans are available will calm markets. That would let Greece borrow normally at acceptable interest rates by selling bonds.
The interest rate gap, or spread, between Greek 10-year government bonds and the German equivalent, considered a benchmark of stability, narrowed by more than 45 basis points to about 350 basis points, or 3.5 percentage points, on Monday morning.
The narrower the spread, the lower the cost to borrow and the greater the confidence in Greece.
The promise filled in details of a March 25 pledge of joint euro-zone-IMF help. That pledge failed to calm investors because it omitted key details and imposed strict conditions that made the money difficult to get.
A French finance ministry official said Sunday’s accord was “necessary and satisfactory.”
“Everyone is happy” with the deal, the official said, speaking on condition he not be named as he was not authorized to speak. “And clearly the market has reacted positively,” he added, noting the rebound in Greek bonds and the euro’s strengthening versus the dollar.
While the plan could be activated as soon as Greece asks for it, Athens insists it prefers to borrow on the market rather than use the rescue.
“The aim is, and we believe we will continue to borrow unhindered on the markets,” Greek Finance Minister George Papaconstantinou, said as he welcomed the decision on Sunday.
Greek finance ministry officials said the deal exceeded their expectations, and the total amount of funds on the table was more than the country needed for this year. They said they would wait to see how the market reacts “in the coming days and weeks” before deciding whether to ask for the plan to be activated.
Greece has long said it needed something that would calm the markets and allow it to borrow at more normal rates than the above 7 percent it was facing last week, in order to allow it breathing space to implement a harsh austerity program it announced in early March.
“Short-term, Greece needs lower interest rates. If the rates do not go down, I think they will use the mechanism,” said independent economist Vangelis Agapitos. “I think it’s been a case of a domino. Greece promised, now Europe has promised, now Greece has to take the gun and use it if the spreads do not go down.”
But the newly announced details of the aid package are expected to calm markets that had been critical of the vaguely-worded pledge made in Brussels in March. The uncertainty, fuelled by rumours that were later denied that Athens was seeking to re-negotiate the plan, had sent Greek borrowing costs spiralling to record highs last week.
“The rescue package promised to Greece covers a longer-than-expected period of three years, a large sum is made available and the interest rate is below the market rate,” said Joerg Kraemer, chief economist of Germany’s Commerzbank AG.
“Greek government bonds with a remaining lifetime of up to three years should clearly benefit from all this,” he said, but noted that given the “still existing long-term risks” the spreads of Greek government bonds are not likely to narrow to pre-crisis levels.
Similarly the euro “should continue to benefit from the more detailed support package as well,” Kraemer said, but added that a major rally was unlikely as Greece’s fundamental problems remain unresolved.
