Bloomberg News

Papademos Expects Better Market View of Europe’s New Crisis Pact

December 10, 2011

(See EXT4 for more on the euro area’s debt crisis.)

Dec. 9 (Bloomberg) -- Greek Prime Minister Lucas Papademos predicted financial markets would react more positively to this week’s European steps to stem the debt crisis than to previous efforts, saying the euro area is committed to aiding distressed governments in return for stricter fiscal discipline.

Government heads in the European Union decided to anchor tougher budget rules in a new euro-area treaty, lend 200 billion euros ($268 billion) to the International Monetary Fund and accelerate to next year the start of a permanent rescue facility. In their fifth attempt at a comprehensive package, the leaders also diluted a provision that bondholders suffer losses in future euro-area rescues.

“These measures will be positively evaluated by the financial markets,” Papademos told reporters today in Brussels after the 15th summit in 23 months to tackle the Greece- triggered debt crisis. “I think that there will be a difference with the past.”

The euro area is seeking to prevent Spain and Italy from being engulfed by troubles that forced Greece to seek an initial rescue in April 2010, pushed Ireland and Portugal into aid programs over the ensuing year and led to a second Greek bailout in late October. The European Central Bank has helped by buying sovereign bonds on the secondary market over the past 19 months to counter increases in borrowing costs.

All-Night Talks

ECB President Mario Draghi joined European political leaders in hailing the latest agreement reached after all-night talks as investors urged him to expand his crisis-fighting tools.

“It’s a very good outcome for euro area members and it’s going to be the basis for a good fiscal compact and more disciplined economic policy in euro area countries,” Draghi told reporters in Brussels.

Papademos, a former ECB vice president, praised decisions yesterday by the Frankfurt-based bank to cut interest rates, offer banks unlimited cash for three years and loosen collateral rules for loans in a bid to bolster lending. The steps are “very important,” he said.

“These decisions of the European Central Bank will contribute to mitigate the nervousness of the financial markets and the consequences on the bonds, and also will mitigate the consequences on the real economy,” Papademos said.

Regarding the euro area’s planned permanent rescue fund, the European Stability Mechanism, the region’s leaders decided to limit so-called private-sector involvement to the terms accepted in IMF bailouts. This marked a climbdown by German Chancellor Angela Merkel, who required bondholder losses as part of Greece’s second aid package and had championed private-sector involvement in future rescues under the ESM.

“This will have a comforting effect on the markets,” Papademos said. “The Greek debt situation was a unique and exceptional case.”

--Editor: Jones Hayden

To contact the reporter on this story: Jonathan Stearns in Brussels at jstearns2@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net


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