Europe signs fiscal pact, hails Greek progress
Merkel says ECB buys time, but Europe must act to contain crisis
By William L. Watts, MarketWatch
FRANKFURT (MarketWatch) — European leaders on Friday signed a new fiscal pact aimed at strengthening budget rules across the euro zone, hailed progress by Greece toward finally receiving its second bailout and signaled a willingness to speed up the funding of the euro zone’s permanent bailout fund.
As expected, the leaders made no commitment to boosting the size of the euro zone’s firewall, but did agree to speed payments of capital into the region’s permanent rescue fund, the 500 billion euro European Stability Mechanism. The ESM will replace the temporary European Financial Stability Facility at midyear.
“As expected, the latest EU summit proved to be a non-event, and was characterized by a rare show of harmony. With the more difficult discussions centered on foreign policy issues, such as Syria, there was little to set the pulse racing on the economic policy front,” wrote strategists at Daiwa Capital Markets.
European Union leaders Friday signed the region’s new fiscal pact, adopting strict new rules on deficits and debts, David Roman reports on Markets Hub. (AP Photo/Francois Lenoir, Pool)
German Chancellor Angela Merkel welcomed what she described as a period of relative calm in the euro-zone crisis, but warned that European leaders must take further action.
“We don’t delude ourselves that the problem has gone away,” she said.
Merkel said the European Central Bank’s massive injections of long-term liquidity into the financial sector via its long-term refinancing operations had bought policy makers time. She also said that such measures wouldn’t be repeated once the crisis is past.
“We certainly will not resort to these types of measures again once this period is over,” she said. “Liquidity will be siphoned out of the market.”
It’s Merkel, however, who has faced pressure from world leaders and the European Union to move more quickly to shore up the region’s bailout fund.
The International Monetary Fund and the Group of 20 have pressed Europe to boost the size of its firewall. G-20 finance ministers last week said an increase in funding for the IMF’s crisis fighting efforts can come only after Europe takes action to boost its own rescue resources.
Analysts said markets paid little heed to developments in Brussels. The euro EURUSD -0.04% traded at $1.3208 versus the dollar, down 0.9% from Thursday.
On Thursday, euro-zone finance ministers indicated Greece was on track to receive its 130 billion euro ($173 billion) bailout once it completes its bond swap with private creditors.
Ministers agreed to release funds needed to facilitate Greece’s bond swap with private investors and said further funds would be released once remaining actions demanded by the country’s troika of international lenders — the European Union, International Monetary Fund, and European Central Bank — were completed.
Greece “undertook decisive and swift legislative action in the areas of fiscal consolidation, revenue administration, pension reform, financial sector regulation and supervision and growth-enhancing structural reforms,” said Luxembourg Prime Minister Jean-Claude Juncker, who chairs meetings of euro-zone finance ministers.
Investors must respond to Greece’s debt-swap offer by March 8. Market participants will be watching to see how many investors take up the offer and whether collective action clauses that would force reluctant bondholders to participate will be activated.
Leaders from all but two EU countries — Britain and the Czech Republic — on Friday signed a new fiscal treaty that aims to enshrine tough new budget rules. The pact is a German-led effort to address the lack of fiscal integration and tough budget surveillance seen by some as a root cause of the euro zone’s debt crisis.
A few hours later, Spanish Prime Minister Mariano Rajoy announced that the country was lifting its deficit target for 2012 from 4.4% of gross domestic product to 5.8%. The move, which could cause friction with Brussels, had long been rumored and comes after the 2011 deficit came in above target at more than 8%.
Spain indicated it intends to stick to its 2013 deficit target of 3%.