Euro zone officials today agreed on the terms of a possible financial rescue for Greece as a credit ratings agency downgraded Athens' debt by two notches citing a worsening economy and rising borrowing costs.
Deputy finance ministers and central bankers of the 16 countries sharing the European single currency decided that any emergency loans would be made on terms almost identical to standard IMF bailouts if Greece needed them, an EU source said.
"A deal has been reached," the source with close knowledge of the discussions told Reuters. "It is almost a carbon copy of International Monetary Fund terms."
But the news brought only momentary relief on credit markets because Fitch Ratings cut Greece's credit rating to BBB- and signalled further downgrades are possible, citing intensifying fiscal challenges in the debt-plagued country.
New figures published today highlighted a deepening recession in Greece that will further aggravate those problems as the government continued to resist market pressure to seek outside help with its debt crisis.
After investors dumped Greek assets this week due to growing doubts over the euro zone/IMF rescue plan, the risk premium on Greek bonds compared to benchmark German bunds briefly dipped below 400 basis points over German bonds on news of the Brussels deal.
Euro zone officials, including the leaders of France and Italy, sought to reassure markets that the financial safety net agreed in principle at an EU summit last month, would be ready if it became needed.
"We are ready to take action at any moment to come to the aid of Greece," French president Nicolas Sarkozy said after talks with Italian prime minister Silvio Berlusconi.
The EU source said that with the technical details of loans for Greece agreed, a decision on lending Athens could now be made in a matter of hours.
A request for assistance from Athens would be analysed by the European Commission and the European Central Bank and the two would suggest the amount and maturity of the loans needed.
"It would be a substantial amount I guess, something sufficient to shock the market," the source said.
"Similarly as in the case of Hungary, when they were given so much money that speculators actually got burned and Hungary didn't actually use that money," the source said.
It would be then up to a quick teleconference of euro zone finance ministers to give the green light to pay out the cash.
But the interest charged would still be high. EU sources said Greece would have to pay more than 6.0 percent to get loans for up to three years and 100 bps more for a longer loan.
"According to the calculations we were given, given current yield curves, the equivalent of the EU formula would be well above 6 per cent, because it has to have this element that it is non-subsidised and close to market," the EU source said.
A second source confirmed the rate would be more than 6.0 per cent. Both noted the calculations were complex, because they were based on a three-month Special Drawing Rights rate that needed to be converted to three-year rates using swap rates.
The IMF charges 3.26 per cent for loans to countries which borrow more than 300 per cent of their quota, which would be the case of Greece as its quota is only $1.25 billion.
According to EU formula, the euro zone would charge also an extra 300 bps on top and an additional 50 bps service charge.
This would still be below, but close to current market yields on Greek debt of 7.3 per cent, according to Tradeweb data. But policymakers still believe the aid may not be needed.
"The threat is not imminent because Greece seems to have enough money - unless something nasty happens in the banking sector, to refinance themselves for the next two months roughly. Or at least the next month," the EU source said.
Greek bank shares gained more than 7.0 percent on word of the euro zone deal after Thursday's 6.0 per cent fall.
Reuters