Saturday, March 27, 2010

EU reaches a deal on Greece [JPMorgan] #IMF #GREECE $EWG

The agreement on a Greek support mechanism reached last night at the EU summit appears to give something to everyone:
The Germans get co-funding with the IMF; The French get a commitment to “a strong coordination of economic policies in Europe”; And the Greeks get a sufficiently detailed mechanism to hopefully bring spreads down ahead of the refinancing of the next couple of months.

It is important to stress that what has been agreed is a support mechanism, not a package of loans to be made to Greece now. Whether or not this mechanism is ever activated remains to be seen. It will depend on how Greece fares in the capital markets in the coming months. It is certainly possible that no money ever changes hands. The details of the EU statement suggest that the Germans have largely stuck to their position, in four respects:

First, the support mechanism has to be considered “ultima ratio”, which means that market financing is insufficient. Any decision on disbursement of financing will be decided by unanimity, which means each country has a veto, and subject to strong conditionality. The European Commission and ECB will play a role in advising on whether disbursement is appropriate.

Second, the mechanism would not provide financing at a concessional interest rate. The borrowing cost would be set at a level to incentivise
Greece to return to capital markets as soon as possible.

Third, any support would involve a “substantial” IMF contribution, albeit with the majority of money coming in the form of coordinated bilateral
loans from the rest of the Euro area (determined by relative size as measured by capital positions at the ECB). Apparently, French President Sarkozy said that the proportions would be one-third IMF and two-thirds Euro area.

EU reaches a deal on Greece

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