Stock markets and the euro rallied on Thursday after European leaders moved closer to hammering out a new rescue plan, including a "Marshall plan" to stimulate the Greek economy.
The euro gained more than one and a half cents to $1.433, after a draft agreement emerged from a crucial summit taking place in Brussels. This plan would give Greece, Ireland and Portugal more time to repay the money loaned to them through their recent bailouts.
Other weaker nations, potentially Italy and Spain, would also be...
offered "precautionary credit lines", in an effort to stop them requiring a full bailout.
Although an agreement may not come until late on Thursday, or on Friday, investors welcomed the details of the draft conclusions. The FTSE 100 erased early losses, and was up 28 points at 5881 in afternoon trading.
It also appears that Angela Merkel has succeeded in rejecting a new levy for the banking sector, proposed by France, and that the European Central Bank has conceded that Greece should execute a "selective default", in a process that could see private investors share some of the costs of a new rescue plan for Athens.
Late-night talks
Markets had earlier been on tenterhooks on Thursday after Germany and France hammered out a last-minute deal on a second bailout of Greece intended to rescue both it and the euro from financial ruin.
French president Nicolas Sarkozy rushed to Berlin on Wednesday and spent seven hours talking to German chancellor Angela Merkel before a crisis summit in Brussels. They managed to agree a compromise on the losses that Greece's private creditors are to take in a complex new bailout for Athens.
European Central Bank president Jean-Claude Trichet, who has been Merkel's most vocal opponent in the wrangling over how to respond to the euro crisis, attended part of the talks.
The deal, following a telephone dispute between the two leaders on Tuesday, is to be put to the heads of the European commission, council and central bank on Thursday morning before an emergency summit of the 17 leaders of eurozone countries.
The euro has earlier fallen to a session low of $1.4183 from $1.4220 after Jean-Claude Juncker, chairman of the eurogroup, said a new aid package for Greece could trigger a selective default on its debt.
Merkel appears to have scored an early victory by sinking the idea of a bank tax. Arriving for the summit in Brussels, Juncker said: "I don't think there will be agreement today on a bank levy."
The notion of a levy circulated this week as the European commission considered whether it could be used to raise €10bn a year to fund Greece's borrowing needs, and avoid triggering a sovereign default on the markets. Sarkozy had proposed the levy, but Merkel was firmly opposed. Germany has already introduced a bank levy at home.
Stock markets across Europe were nervous on Thursday, with the FTSE 100 index falling 45 points to 5808. Gilts slid along with bunds while government debt in Greece, Spain, Portugal and Italy rose slightly in value.
"France and Germany striking an accord is very good news for the eurozone and is what we have been looking for and it has been greeted quite well," said Will Hedden, sales trader at IG Index. "But the risk of contagion still remains, the Greece problems has not really gone away, just been brushed aside."
The new bailout would supplement the €110bn (£97bn) package for Greece launched in May last year. It is expected to include fresh emergency loans to Athens from eurozone governments and the International Monetary Fund, as well as other measures.
Former UK chancellor Alistair Darling said on the BBC Today programme: "We are involved in this. Most of our exports go to European countries. You can see real calamity facing us." He pointed to the possibility of the US losing its prized top-notch credit rating, the eurozone troubles and "sluggish growth" in Britain.
No details of the Berlin pact were revealed, leaving analysts to speculate. "Markets will react positively if they get a sense that the politicians and central bankers are getting ahead of the curve," said Louise Cooper, markets analyst at BGC Partners in London.
Senior officials at the European commission in Brussels indicated a compromise was in the air to save Greece and halt contagion with a long-term Greek debt rollover stretching for decades, and other measures aimed at reducing Greece's crippling debt level. It appeared that the multi-pronged formula would inexorably lead to Greece being deemed to be in sovereign default, at least temporarily.
Cooper said: "So what is in this deal? Well, the plan to make private sector bondholders share the pain via a eurozone bank tax seems to be firmly on the table. But this is rather a circuitous route from A – Greece cannot afford to pay back its debt – to B – the banks who hold their bonds need to accept less back from Greece. The direct route from A to B was limited by the credit ratings agencies – they warned that the French plan to 'voluntarily' roll over Greek debt would constitute a default. So the power players are taking a more tortuous route to ensure that banks 'share the pain'.
"However the end result is still the same – that banks will make less profit – either they take writedowns on their Greek debt – [a] classic default – or they pay more tax. Less profits, less retained earnings, less capital. And already many European banks are undercapitalised – draft proposals suggest that a total of €460bn of capital needs to be raised by 2019 by banks. Getting banks to pay more tax is only going to make the underlying problem worse – banks need more capital – where are they going to get it from?"
The Brussels summit – the 10th time in 18 months that European leaders have tried to save the euro and Greece from collapse – is being staged amid grave pessimism that politicians will be able to bury their differences and combine to rescue the single currency.
guardian
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