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Europe announces a fresh, ‘credible’ Greek rescue deal

Cempaka — Thu, 21 Jul 2011 22:53:00 +0000

Deutsche Welle, 22 July 2011

Greece’s second aid package is
larger than the first

European leaders say the eurozone, the International Monetary Fund and the private sector will all contribute towards a second package of emergency loans for Greece, as a debt-dominated summit concludes in Brussels.

European Union President Herman van Rompuy said after Thursday’s summit in Brussels that the bloc had reached three important decisions which had unanimous support within eurozone.

“We improved the Greek debt sustainability, we took measures to stop the risk of contagion, and finally, we committed to improve the eurozone’s crisis management,” Rompuy said in the opening moments of his official address.

The EU president said that the instability of the Greek economy, coupled with the resultant jitters on international markets, ultimately could have threatened the single European currency and the economic recovery in Europe and the wider world.

“Convening this meeting focused the minds and accelerated finding a solution. I could not allow a difficult situation to become a dangerous one,” Rompuy said.

The nuts and bolts

European leaders in conjunction with the International Monetary Fund (IMF) agreed to lend Greece an additional 109 billion euros (157 billion dollars) in order to cover its financing shortfalls and prevent Athens from defaulting on its sovereign debt.

The program will include lower interest rates and extended maturities as well as a voluntary contribution from private sector financial institutions amounting to 37 billion euros, according to a statement released by the leaders after the summit.

Merkel and Sarkozy struck an
agreement before the summit

European Central Bank chief Jean-Claude Trichet reacted coolly to concerns that even voluntary participation by the private sector could provoke rating agencies to downgrade Greece’s credit worthiness.

“I don’t think experts consider that what has been done would trigger a credit event,” Trichet said after the summit.

‘European package’

Greece’s second aid package, including private contributions, will total at least 146 billion euros. The package comes in addition to the 110 billion euros Athens was promised as part of its first bailout in 2010.

“The only thing we’re asking for is the right to make deep changes in our country to make our country a viable one, one of growth and jobs creations,” Greek Prime Minister George Papandreou said. “This is a European success, a European package.”

The breakthrough deal was made possible after German Chancellor Angela Merkel and French President Nicolas Sarkozy came to an agreement in Berlin on Wednesday.

Sarkozy said that Europe was prepared to stand with Athens and guarantee its credit worthiness in the event that credit agencies declare Greece in limited default.

“We have agreed to create the beginnings of a European Monetary Fund,” he said.

Author: Spencer Kimball, Mark Hallam (AFP, Reuters, dpa)

Editor: Joanna Impey

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Indonesia Exposure to Global Risk is Limited: IMF

Cempaka — Thu, 21 Jul 2011 10:46:00 +0000

Jakarta Globe, July 21, 2011

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Indonesiafaces limited exposure to a large exit of foreign capital at a time of globalrisk aversion due to strong fundamentals and relatively low dependence onexternal demand, the IMF said on Thursday.

TheInternational Monetary Fund cited the country’s strong export growth, includingin manufacturing, and said the continued flexibility of the rupiah’s exchangerate would help protect against volatile cash inflows.

Thecomments come as Indonesia’s central bank tries to cap huge inflows of foreigncash from investors seeking higher interest rates than in the West, which itfears could trigger economic instability.

“IndonesianGDP growth is projected to remain robust at around 6.5 percent in 2011–12,”the IMF said in a statement following a consultation with Indonesian officialsand central bankers.

“Increasesin both foreign and domestic investment are supporting growth, whileaccelerating credit growth and expected reductions in energy subsidies shouldpush core inflation modestly higher this year and into 2012,” it said.

The fundalso urged Indonesia to reduce fuel subsidies so that it could boost spendingon infrastructure and social welfare.

IMF,however, said there was a risk of higher inflation if the government cut energysubsidies, and that the central bank would need to “act decisively” if thegovernment took that course.

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S&P warning puts damper on Eurogroup plans

Cempaka — Tue, 05 Jul 2011 19:47:00 +0000

Deutsche Wellle, 5 July 2011

Standard & Poor’s is critical of
the banks’ plans

The Standard & Poor’s rating agency says a debt rollover plan pushed by French banks would amount to a default, putting a damper on European efforts to solve the Greek debt crisis.

French banks last week thought up what they figured was a really good plan: a debt rollover plan under which some of the Greek bonds would be voluntarily renewed when they become due, but on different terms, giving Greece some breathing space without actually reducing the amount owed to creditors.

German banks, which together with French banks and insurance companies are among the major holders of Greek debt, agreed to the plan – and so did the German finance ministry.

But the ratings agency Standard & Poor’s warned on Monday that this option “would likely amount to a default under our criteria.” The other two major rating agencies, Fitch and Moody’s, did not react immediately, but it was expected that they could well come to a similar assessment.

S&P warning calls into question second bailout package

Since German banks have made it clear that any solution to the Greek debt crisis which rating agencies viewed as a default was not viable, that would call into question the voluntary contribution of banks and insurance companies to a second bailout package designed to help Greece through to 2014.

Eurozone finance ministers put off
deciding on a second bailout package
to help Greece

At the weekend, the finance ministers of the 17 eurozone countries put off a decision about such a bailout, which is expected to amount to 80 to 90 billion euros ($116 to 131 billion) because of conflicts over the extent of private sector involvement in the effort.

The eurozone ministers did sign off an 8.7 billion euros loan to Greece which is part of an 110 billion euros package agreed upon last year. Without this loan, the Greek government would have faced insolvency within weeks. But without a second bailout deal, a funding shortfall is imminent between 2012 and 2014.

Criticism grows louder of rating agencies’ power

With the controversy surrounding a second bailout package due to the assessment of Standard & Poor’s, criticism of the big rating agencies’ power is growing louder.

ECB member Ewald Nowotny is
one of the rating agencies’ critics

European Central Bank policymaker Ewald Nowotny told Austrian public radio that the rating agencies were placing obstacles in the way of those banks willing to contribute to Greece’s financial stabilization.

The Bavarian finance minister, Georg Fahrenschon of the conservative Christian Social Union party, or CSU, told the German newspaper Passauer Neue Presse that the warning issued by S&P was “inappropriate.” And Joachim Poss, finance expert for the Social Democrats in the German Parliament, told Deutsche Welle that the game the US rating agencies were playing had to make one “uneasy.”

The three major rating agencies hold a collective market share of roughly 95 percent. Their special status has been cemented by law – at first only in the US, but then in Europe as well.

“The ratings from the big three were declared mandatory for European firms active in the US market,” Thomas Straubhaar, the director of the Hamburg Institute of International Economics told Deutsche Welle.

The agencies rate the creditworthiness of companies and countries, as well as the quality of funds and stocks. Their assessment determines the conditions under which firms, banks or countries may borrow money on the capital markets.

“We can’t have private companies, whose primary goal is maximizing profit, behaving like sovereign judges passing down opinions that are binding for disinterested third parties,” Straubhaar said.

EU makes efforts to curb the influence of the three big players

Over a year ago, the heads of the state and governments of the 27 European member states called upon the Union’s executive body, the European Commission, to come forward with proposals on how to supervise credit rating agencies. The Commission then proposed to set up a a new European supervisory authority, the European Security Markets Authority (ESMA).

The European Commission set up a new supervisory body for
rating agencies.

ESMA started work on January 1, promising to compel rating agencies to disclose the methodology of their ratings. But so far, the power of the big rating agencies appears unfettered.

Apart from calling for closer supervision of the big rating agencies, many European politicians have supported the creation of a European ratings agency. An independent European rating agency was indispensable, Bavarian finance minister Georg Fahrenschon said.

But economists are not so sure such a European agency would change much. “We don’t need rating agencies to tell us that Greece is on the verge of bankruptcy,” said Thomas Straubhaar. “A European agency would not be able change anything about this fact, nor could it correct it.”

And Torsten Hinrichs of Standard and Poor’s told Deutsche Welle investors were already free to place their trust in a whole range of agencies.

So even if a European ratings agency was to come into existence, it would still have to establish itself on the market and gain investors’ trust.

Author: Andrea Rönsberg

Editor: Nicole Goebel

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