Global markets rallied, though some only briefly, following news at the weekend that about €45bn will be made available to Greece by her eurozone partners and the International Monetary Fund (IMF). The loan amounts to almost a fifth of the country's gross domestic product (GDP).
Temporarily at least, the Greek government is celebrating a rare victory over the speculators. The Prime Minister, George Papandreou, said the aid package sent "a clear message that nobody can play with our common currency and our common fate".
The euro showed the strongest reaction, jumping sharply against the dollar and sterling. The costs of insuring Greek sovereign debt – credit default swap premia – also fell from about 400 basis points to 350. There was a similar easing in Greek government bond yields; the return on 10-year Greek bonds was down from 7 per cent to 6.65 per cent.
Equity markets from the FTSE 100 to the Dow Jones also registered their relief, though the initial gains in London were pared back by the time markets closed. Investors and European officials alike hope the fact that the details of the rescue package have now been made public will mean it is less likely that the emergency aid will actually be called upon.
As was indicated in briefings when eurozone finance ministers agreed the deal a fortnight ago, the eurozone nations, mainly Germany, would provide the bulk of the funding via bilateral loans. Some $30bn will be available and a further €15bn will be left to the IMF, which already has an advisory presence within the Greek government.
At about 5 per cent, the cost of funding will be below the punitive rates demanded by investors of up to 7 per cent. Analysts said the money should last until the end of the year. Financial support for subsequent years would be determined by joint agreement.
However, few believe the crisis has been finally resolved. Fitch, the ratings agency which helped to prompt the latest twist in the crisis by downgrading Greek debt to BBB- status, the same as Bulgaria and Peru and one notch above junk status, spoke for the more sceptical. Its analyst, Paul Rawkins, said there was insufficient detail and warned: "We still have concerns about the prospects of sustaining fiscal consolidation. It doesn't change the action we took."
An early test of the credibility of the deal will come today when Greece tries to roll over some €1.2bn in short-term debt. Whatever happens, the Greeks seem destined for more economic pain.
Dominique Strauss-Kahn, the managing director of the IMF, said: "The only effective remedy that remains is deflation. And this is exactly what the European Commission has correctly recommended.
"The way out of debt in most countries is led by a reform of the pension or healthcare system."Reuse content