Feb. 11 (Bloomberg) -- European leaders ordered Greece to get the bloc’s highest budget deficit under control and promised “determined” action to staunch the worst crisis in the euro currency’s 11-year history.
The agreement, brokered by German Chancellor Angela Merkel, Greek Prime Minister George Papandreou and European Central Bank President Jean-Claude Trichet, called for closer monitoring of the Greek economy and stopped short of offering concrete measures to help officials in Athens handle a debt load exceeding annual economic output. Greek bonds rose and the euro fell after the deal was announced at a European Union summit.
“It’s a political message that we wanted to send out today,” EU President Herman Van Rompuy told reporters today in Brussels. “This political message has a responsibility dimension to it. The Greek government is taking on a responsibility.”
“Our European way of life is at stake,” he said.
The EU leaders’ statement, which Merkel called a “clear political signal” to Greece, left open how the EU would respond to a fresh wave of speculative attacks against Greece or countries such as Spain and Portugal, which are also struggling to cut their budget deficits. The statement echoes prior calls for Greece to clean up its accounts and gave the International Monetary Fund a monitoring role.
Euro-region leaders also discussed the creation of a lending facility for Greece, an EU official said. States would contribute in proportion to the size of their economies, said the official in Brussels, who spoke on condition of anonymity. The official said it’s “not yet time” for a European bond.
‘Doing Something’
“Markets seem to be happy that they are doing something. The problem is if they come out with an ad hoc temporary solution for Greece then people wonder what happens when the next country comes into trouble,” said Nick Kounis, chief European economist at Fortis Bank Nederland NV in Amsterdam. “This whole thing needs to be institutionalized.”
Greek bonds, which have plunged since December on concern about the country’s ability to tackle its deficit, extended a three-day rally, with the yield on the two-year government bond falling 39 basis points to 5.07 percent as of 4:50 p.m. in Brussels.
Euro Weakens
The euro weakened 0.9 percent to $1.3616. Its slide to a nine-month low of $1.3586 on Feb. 5 forced Greece to the top of the EU agenda out of concern that market turmoil might spread.
The pre-summit statement bore the imprint of Merkel, who as head of Europe’s largest economy, pressed for strict conditions on any European financial lifeline for countries that spend too much and save too little.
“Greece won’t be left alone but there are rules and these rules must be adhered to,” Merkel told reporters. “On this basis we will agree on a statement.”
Greece, representing 2.7 percent of the bloc’s $13 trillion economy, posted a budget deficit of 12.7 percent of gross domestic product in 2009, the highest in the euro’s 11-year history and more than four times the EU’s 3 percent limit.
Papandreou’s government needs to sell 53 billion euros ($73 billion) of debt this year, the equivalent of about 20 percent of GDP. Greece’s credit rating was cut by Standard & Poor’s, Moody’s Investors Service and Fitch Ratings in December.
Papandreou’s plans to cut public-sector wages, trim welfare provisions and raise taxes have provoked street protests that threaten to throw the government off course.
‘Every Detail’
Belt-tightening measures “will be implemented in every detail,” Papandreou told reporters in Paris yesterday.
Other officials in the pre-summit crisis session included Van Rompuy, French President Nicolas Sarkozy, Spanish Prime Minister Jose Luis Rodriguez Zapatero and Luxembourg Prime Minister Jean-Claude Juncker, who heads the panel of euro-region finance ministers. U.K. Prime Minister Gordon Brown, in London when the meeting started, said Greece is in the hands of countries using the euro.
Called by Van Rompuy to sketch out a 10-year economic strategy, the summit has turned into a crisis-management exercise that tests Europe’s ability to run a common currency with 16 separate national fiscal policies.
For that reason, EU officials have resisted putting Greece in the sole hands of the IMF, concerned that recourse to outside assistance would expose Europe’s inability to get its own house in order.
The EU needed to act to calm exaggerated fears in the markets, a French official told reporters late yesterday. Spanish Finance Minister Elena Salgado distanced Spain’s fiscal woes from Greece’s, saying “whatever is said today will be very specifically aimed at Greece.”
Break With Past
Whether from individual countries or the EU as a whole, a financial lifeline for Greece would open a new chapter in the euro experiment by breaking with the orthodoxy that each country has to steer its own economy.
“I don’t think there is any bluff here. This is a very, very serious commitment to back up Greece,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Plc in London. “This is once in a lifetime moment for monetary union.”
To contact the reporter on this story: James G. Neuger in Brussels at jneuger@bloomberg.net
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