THE EUROPEAN Central Bank (ECB) has moved to shore up the €110 billion EU/IMF rescue of Greece by offsetting the impact of the “junk” rating on the country’s debt.
But markets greeted the plan with caution, sending the euro down and delivering only a modest improvement in Greek bond yields and the yields on Spanish and Portuguese debt.
As German chancellor Angela Merkel moved to sell the rescue to her sceptical public, the Greek prime minister George Papandreou came under pressure from the country’s president to ensure a draconian new austerity plan wipes out tax fraud.
The austerity plan, which includes tax hikes, pay cuts and an increased average retirement age, is designed to trim the country’s deficit by 6.5 per cent of GDP this year, said European Commission officials.
In defiance of a “junk” rating on Greek debt by Standard Poor’s (SP) one week ago, the ECB boosted the rescue effort by suspending its minimum credit rating threshold on Greek sovereign debt.
The suspension means Greek debt will continue to be eligible as collateral for ECB refinancing even if SP’s rivals Moody’s and Fitch assign a similar non-investment grading on the country’s paper. “This suspension will be maintained until further notice,” the ECB said.
Rescue loans will be available to Greece in time to refinance an €8.5 billion debt due on May 19th, EU officials said.
But the euro declined against the dollar, confounding expectations it would rise on foot of the aid deal.
The currency fell to $1.319 late yesterday from $1.325 before euro zone finance ministers activated the aid programme.
While Greek bond yields declined only marginally yesterday, the European authorities say the rescue means the country will not need private credit for at least 18 months.
The impact on the yields on debt issued by Spain and Portugal – the two countries considered most vulnerable to contagion from the Greek crisis – was marginal.
Spain’s two-year yield rose to 1.93 per cent but the spread between its 10-year debt and comparable German bonds narrowed to 0.97 percentage points.
The Portuguese two-year yield dropped 0.21 percentage points while the spread over 10-year German notes declined to 2.05 percentage points from 2.12 points.
As euro zone governments prepare legislation to facilitate their participation in the rescue, Mr Papandreou faces renewed street protests. With the pain in the new austerity plan frontloaded this year, containing industrial disruption will be a crucial challenge in the weeks and months ahead.
The country’s biggest public sector union responded to the new austerity plan by bringing forward the start of national strike to this morning, saying about 500,000 workers will now stay off the job for 48 hours instead of 24 hours.
Local newspapers greeted the rescue package as harmful for Greeks, with the centre-left daily Ethnos saying the plan meant “asphyxiation” for the economy.
