Eurozone fights to contain crisis amid new bid to rescue Greece
Single currency expected to plunge after chaotic weekend that saw emergency talks on restructuring of nation's debts
Eurogroup president Jean-Claude Juncker eventually admitted that Greek debts had been discussed by EU finance ministers.
Heather Stewart
The Observer, Sun 8 May 2011 00.01 BST
Eurozone finance ministers are battling this weekend to contain a mounting sense of crisis about the future of the single currency as details emerge of secret talks on restructuring Greece's debts.
Analysts expect a sharp sell-off of the euro when markets open tomorrow morning, as investors digest the fallout from reports – swiftly scotched – that Greece was considering leaving the eurozone.
"Perhaps we have crossed a rubicon," said Jonathan Loynes, European economist at Capital Economics. "The knee-jerk response will probably be to push the euro lower. I believe the euro should be at parity with the dollar, not at $1.44 – I don't know what it's doing at anything like these levels."
Euro policymakers at first denied that a meeting was taking place, but were later forced to admit that the German, French and Italian finance ministers had been holed up in a chateau in Luxembourg with their Greek counterpart George Papaconstantinou, discussing options for dealing with Greece's unsustainable debt burden.
Rumours swept through financial markets late on Friday that Greece was threatening to leave the eurozone and reintroduce the drachma, but that was furiously denied by Athens yesterday.
"During this meeting Greece's participation in the eurozone was neither raised nor discussed, as was irresponsibly reported by certain media for their own reasons," the finance ministry said.
"The Greek government remains firmly committed to the implementation of its economic adjustment programme agreed with the EU, ECB and International Monetary Fund in order to put the country's finances in order and place Greece on a path of sustainable growth."
Germany also denied that a Greek exit had been discussed, and Jean-Claude Juncker, president of the "eurogroup" of finance ministers, dismissed it as a "stupid idea". But analysts said the eurozone's management of the financial crisis had seen a repeated pattern of denial, followed by U-turn. "It's a bit like the chairman of a football club saying 'we stand 100% behind the manager'. That's usually what they say when they've already sacked him,'" said Erik Britton of consultancy Fathom.
While denying the reports that Greece had threatened to leave the single currency, Juncker conceded a "further adjustment programme" for Greece would be on the agenda when eurozone ministers met in Brussels on 16 May, when they are also expected to discuss the details of Portugal's rescue package.
Greece received a €110bn (£96.2bn) bailout from its eurozone neighbours and the IMF last year, but investors have become increasingly convinced that with the economy deep in recession, it will still be unable to meet its repayments.
A restructuring could mean lengthening the terms of some of Greece's loans, or more dramatic steps such as forcing holders of its bonds to take a "haircut" – a reduction in the bonds' face value.
Sony Kapoor, director of European thinktank Re-Define, said the eurozone should take drastic action. He said: "The choice is between the benign but essentially futile options, or the more aggressive but successful."
Juncker's admission that a restructuring is being considered is likely to hit the share prices of Greek bondholders, including many European banks, when markets reopen, and there are fears that the loss of confidence in the eurozone's ability to contain the growing crisis could also spread to Spain.
"Spain is the key," said Britton. "If Spain were to default, we're in a Lehman Brothers market – right back in the heart of the financial crisis." Fathom calculates Spain's fiscal position will eventually make a debt restructuring inevitable.
The euro has lurched from one crisis to another since the credit crunch swept through world markets in 2008, with finance ministers repeatedly seeking to staunch the markets' anxieties about the solvency of debt-ridden Greece, Portugal and Ireland.
Single currency expected to plunge after chaotic weekend that saw emergency talks on restructuring of nation's debts
Eurogroup president Jean-Claude Juncker eventually admitted that Greek debts had been discussed by EU finance ministers.
Heather Stewart
The Observer, Sun 8 May 2011 00.01 BST
Eurozone finance ministers are battling this weekend to contain a mounting sense of crisis about the future of the single currency as details emerge of secret talks on restructuring Greece's debts.
Analysts expect a sharp sell-off of the euro when markets open tomorrow morning, as investors digest the fallout from reports – swiftly scotched – that Greece was considering leaving the eurozone.
"Perhaps we have crossed a rubicon," said Jonathan Loynes, European economist at Capital Economics. "The knee-jerk response will probably be to push the euro lower. I believe the euro should be at parity with the dollar, not at $1.44 – I don't know what it's doing at anything like these levels."
Euro policymakers at first denied that a meeting was taking place, but were later forced to admit that the German, French and Italian finance ministers had been holed up in a chateau in Luxembourg with their Greek counterpart George Papaconstantinou, discussing options for dealing with Greece's unsustainable debt burden.
Rumours swept through financial markets late on Friday that Greece was threatening to leave the eurozone and reintroduce the drachma, but that was furiously denied by Athens yesterday.
"During this meeting Greece's participation in the eurozone was neither raised nor discussed, as was irresponsibly reported by certain media for their own reasons," the finance ministry said.
"The Greek government remains firmly committed to the implementation of its economic adjustment programme agreed with the EU, ECB and International Monetary Fund in order to put the country's finances in order and place Greece on a path of sustainable growth."
Germany also denied that a Greek exit had been discussed, and Jean-Claude Juncker, president of the "eurogroup" of finance ministers, dismissed it as a "stupid idea". But analysts said the eurozone's management of the financial crisis had seen a repeated pattern of denial, followed by U-turn. "It's a bit like the chairman of a football club saying 'we stand 100% behind the manager'. That's usually what they say when they've already sacked him,'" said Erik Britton of consultancy Fathom.
While denying the reports that Greece had threatened to leave the single currency, Juncker conceded a "further adjustment programme" for Greece would be on the agenda when eurozone ministers met in Brussels on 16 May, when they are also expected to discuss the details of Portugal's rescue package.
Greece received a €110bn (£96.2bn) bailout from its eurozone neighbours and the IMF last year, but investors have become increasingly convinced that with the economy deep in recession, it will still be unable to meet its repayments.
A restructuring could mean lengthening the terms of some of Greece's loans, or more dramatic steps such as forcing holders of its bonds to take a "haircut" – a reduction in the bonds' face value.
Sony Kapoor, director of European thinktank Re-Define, said the eurozone should take drastic action. He said: "The choice is between the benign but essentially futile options, or the more aggressive but successful."
Juncker's admission that a restructuring is being considered is likely to hit the share prices of Greek bondholders, including many European banks, when markets reopen, and there are fears that the loss of confidence in the eurozone's ability to contain the growing crisis could also spread to Spain.
"Spain is the key," said Britton. "If Spain were to default, we're in a Lehman Brothers market – right back in the heart of the financial crisis." Fathom calculates Spain's fiscal position will eventually make a debt restructuring inevitable.
The euro has lurched from one crisis to another since the credit crunch swept through world markets in 2008, with finance ministers repeatedly seeking to staunch the markets' anxieties about the solvency of debt-ridden Greece, Portugal and Ireland.
