INTERNATIONAL. European leaders declared a turning point in the Greece-fueled debt crisis, shifting their focus away from the budget-cutting spree that has dominated two years of rescue operations.
With a second Greek aid package wrapped up and the euro region slipping into recession, the leaders committed to a pro- growth agenda that sits uneasily with a deficit-control treaty that was signed today at the 17th summit since the outbreak of the crisis.
“Targets on deficits and debt are intermediate targets, no aim in itself,” European Union President Herman Van Rompuy said. “The restoration of confidence in the future of the euro zone will lead to economic growth. This is our ultimate objective.”
European leaders are on guard against a repeat of the false dawn of mid-2010, after Greece’s first bailout and the setup of a rescue fund. A phase of market calm was jolted by German demands for bond writeoffs that rattled investors, forcing Ireland and Portugal to fall back on emergency aid.
Greece’s 130 billion-euro (US$172 billion) second package, confirmed on the eve of the summit, brought to at least 386 billion euros the sums committed or disbursed by European governments and the International Monetary Fund to underpin the euro.
Added to that are 219.5 billion euros spent by the European Central Bank to buy the bonds of struggling countries, and another 1.091 trillion euros in unprecedented ECB loans to tide the banking system through the crisis.
The Euro Stoxx 50 Index has advanced to a seven-month high and yields on Spanish and Italian government bonds have plunged as investor concerns that the single currency was at risk eased.
“For the short term the risk of contagion has been eliminated, but the deeper problems are still there,” Zsolt Darvas, an economist at the Bruegel research institute in Brussels, told Bloomberg Television today.
The next hurdle is to line up private investors to take losses of more than 70% on Greek bonds, the key plank in a strategy to reduce Greece’s debt to about 120% of gross domestic product by 2020, a figure still double the euro-area limit.
Finance ministers will hold a March 9 teleconference to review the outcome of a debt-exchange offer. The incentive for bondholders is that a refusal to take part might lead to even bigger losses.
Whether there is a fallback position was left open. Luxembourg Prime Minister Jean-Claude Juncker said there is a back-up plan for Greece, Finnish Prime Minister Jyrki Katainen said there isn’t and Lithuanian President Dalia Grybauskaite, from outside the euro, saying: “If we need in the future a third package, there will be a third package.”
Prime Minister Helle Thorning-Schmidt of Denmark, another euro outsider, concluded: “Everyone knows that we are not completely finished in terms of the Greek situation, but everyone understands that we take substantial steps in a positive direction. For the first time in many, many months this is not a crisis summit.”
Leaders labeled Greece a “unique” case, promising that bond writedowns are a thing of the past, in a reversal of the strategy imposed in late 2010 by Chancellor Angela Merkel of Germany, Europe’s dominant country.
Merkel executed another reversal at the summit, speeding up the payments into the planned 500 billion-euro permanent rescue fund barely a year after she won an agreement to slow them down.
Under pressure from world leaders and the IMF to reinforce the European firewall, the euro’s stewards pledged to pay the first two annual installments into the fund this year. Known as the European Stability Mechanism, the permanent fund will go into operation in July.
The timing of the remaining three instalments to bring it up to its 500 billion-euro capacity will be set later in March, along with a decision whether to add on the 250 billion euros left in the temporary rescue fund, the European Financial Stability Facility.
The month will also bring an austerity-versus-growth confrontation, as the signers of the freshly minted deficit- reduction treaty weigh whether to give Spain extra time to bring its deficit below the euro limit of 3% of GDP.