European leaders agreed to strengthen the eurozone bailout fund on Saturday, make its loans cheaper and lower the interest rate on funds extended to Greece, a move to get on top of the year-long debt crisis. As part of a bold series of steps that may help to calm some of the pressure in financial markets, the leaders of the 17 countries that share the European single currency said they would increase the guarantees they provide to the bailout fund to allow it to raise capital on international markets.
-- EFSF fund to be increased to full 440 billion euros
-- Greece to get lower rate on loans, longer maturity
-- Agreement aims to draw line under year-long debt crisis
As a result, the effective lending capacity of the European Financial Stability Facility will be increased to the full 440 billion euros, from a current level of around 250 billion euros. That should ensure that the fund is capable of bailing out any eurozone states beyond Greece and Ireland that require assistance, with Portugal seen as the next most likely country to need financial help, and possibly Spain after that.
The leaders also agreed to lower the interest rate and lengthen the maturity on loans extended to Greece, reducing the rate by 100 basis points to bring it into line with IMF lending. The term on the 110 billion euros of EU/IMF loans was lengthened to 7.5 years from three, giving Athens more time to repay. Any loans made by the EFSF to any new potential applicant country would be in line with IMF rates. The EFSF now charges a 300 basis point penalty fee for its credit and a 50 basis point one-off charge.
While Portugal, which is currently paying around 7.5 percent on its 10-year bonds, is regarded as a candidate for a bailout, it reiterated on Saturday that it did not need help and had no intention of asking the EU for assistance. Ahead of Friday's meeting, Portugal announced a series of extra spending cuts to bring its budget deficit down to 4.6 percent in 2011, steps that were praised by the European Commission and the European Central Bank and may help convince markets that Lisbon is doing enough to stave off attack.
Ireland, which received an 85 billion euro bailout from the EU and IMF last November, may also benefit from the lower rates granted to Greece, but it will depend on discussions on a common corporate tax base, which Ireland opposes. Newly elected Irish Prime Minister Enda Kenny said he had made it clear during more than seven hours of talks that a harmonised EU tax base would be detrimental to Ireland, which has an attractive 12.5 percent corporate tax rate.
French President Nicolas Sarkozy said a deal on Ireland could still be reached at a summit on March 24/25, when EU leaders will meet to sign off on what they have called a "comprehensive package" to tackle the debt crisis. In further changes to try to make the EFSF more flexible and better able to stave off pressure in financial markets, the leaders agreed to let the bailout fund buy the bonds of distressed eurozone member states in the primary market.
That will also be the case with the European Stability Mechanism, a permanent facility that will replace the EFSF from mid-2013 and will have an effective lending capacity of 500 billion euros. Bad debts in the European banking system continue to undermine efforts to get on top of the broader crisis, exacerbating sovereign debt problems. Many analysts say the sovereign debt crisis cannot be resolved without a solution to the bad banking debts, which could involve debt restructuring. The leaders also agreed that countries that have a debt level above the EU limit of 60 percent of gross domestic product should reduce it by 1/20 of the amount above 60 percent each year.
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