July 12, 2011

Euro Zone Pledges Help for Greece, But Sets No Timetable

Longer debt maturities on tap as contagion spreads to Italy and Spain

Euro zone finance ministers left their Monday meeting with some ideas sketched out on how to help Greece through its financial crisis, but no plan on when to implement them. Meanwhile, fears over Italy and even Spain roiled the markets.

Reuters reported that among the strategies promised were longer debt maturities and a more flexible rescue fund to aid weaker euro zone members. Ministers also chose not to rule out the possibility of selective default for Greece, but since they could not agree on exactly what should come next, they closed their eight hours of talks without taking action.

Both Spanish and Italian bond yields suffered Tuesday, with the Italian 10-year bond topping 5.7%. Despite this and other turbulence in the markets, Wolfgang Schaueble, Germany's finance minister, said there was no need to rush. He was quoted in the report saying, "We have time on Greece. The next tranche is due in September. By then a new program has to be decided."

Two main possibilities under discussion are a secondary market buy-back of Greek debt and a German proposal for a bond swap for longer maturities. Other strategies were under discussion as well, as implied in the statement they released after their meeting: "Ministers stand ready to adopt further measures that will improve the euro area's systemic capacity to resist contagion risk, including enhancing the flexibility and the scope of the EFSF, lengthening the maturities of the loans and lowering the interest rates, including through a collateral arrangement where appropriate."

George Papandreou, Greece's prime minister, was highly critical of their failure to act, saying in an open letter to Jean-Claude Juncker, chairman of the Eurogroup, "Crunch time has arrived and there is no room for indecisiveness and errors such as taking decisions that in the end prove 'too little, too late' to convince the markets we are serious; [and] making compromises that satisfy our internal political 'red lines' that in the end substitute tactical politics for sound management of the crisis."

Euro zone officials hope to be able to reach firm decisions at another meeting this month.

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