Euro zone set to agree safety net for Greek debts

EURO ZONE finance ministers hope to reach agreement today on how to support Greece if it fails to refinance its debts.

Proposals include direct loans from individual governments and a system of loan guarantees, all tied to strict Greek observance of fiscal discipline and implementation of structural economic reforms. However, ministers of the 16 nations are not expected to make an explicit offer of aid, partly because Greece has made no request and partly because its fiscal outlook is regarded as less threatening than in late January and February.

“At this point in time, it does not need help,” Christine Lagarde, France’s finance minister, told the Financial Times. “It was able to raise capital quite constructively and positively with financial terms that were not totally unreasonable, which demonstrated that the market has appetite for Greek debt – so, as far as we are concerned, there is no such need.”

The initiative may nevertheless mark a significant step forward in the economic governance of the euro zone, which to now has lacked an instrument for helping a member state in severe difficulties.

Euro-zone governments take the view that the credibility of Europe’s monetary union requires them to find a home-made solution for Greece rather than allowing one of their number to turn to the International Monetary Fund for aid. “If Greece fails and we fail, this will do serious and maybe permanent damage to the credibility of the European Union,” Olli Rehn, the EU’s monetary affairs commissioner, said. “The euro is not only a monetary arrangement but a core political project of the European Union.”

Euro-zone governments and the European Commission have placed Greece’s economic policies under the tightest surveillance applied to any country since the euro’s birth in 1999.

Commission president José Manuel Barroso said last week the financial support mechanism would be constructed in such a way that neither individual governments nor the euro zone collectively would be assuming Greece’s debts. The German government regards this as essential, because EU treaty law contains a “no bail-out” clause that could be invoked by domestic opponents of financial aid for Greece in a constitutional lawsuit.

Euro-zone officials said Germany’s role might involve KfW, a state-owned development bank whose remit includes the financing of “internationally agreed support programmes” and supplying funds “in the interests of the German and European economy”.

The origins of the rescue plan for Greece lie in a decision by euro-zone heads of government on February 11th that they would take “determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole”. – Copyright The Financial Times 2010