By Herman Van Rompuy, President of the European Council
A week ago the Leaders of the Euro area met in Brussels. We had two aims in mind: to ensure the financing of the Greek program and improve the sustainability of the Greek debt, and to restore market confidence in sovereign Euro debt. We took important decisions for the future of Greece and for the euro area as a whole. Probably for the first time we covered all the sides and angles of the debt crisis in the euro area. However a number of misunderstandings have arisen over the past few days. Some are due to the complexities involved, some to the requirements of parliaments in certain Member States, and some may even stem from positions taken in the markets. As a consequence I think it is useful to clear up a number of issues under discussion.
We wanted to address the concerns related the sustainability of Greece’s debt. Although the last review by the IMF, the ECB, and the European Commission had concluded that this debt is sustainable, we decided to alleviate this burden. Our decisions were threefold:
- First, we will provide additional funding to support the Greek program up to 2014;
- Second, we lowered the interest rate on the public funds we are lending to Greece to close to our cost of funding (i.e. between 3.5 % and 4%), and we extended their maturity from the current ,5 years to a minimum of 15 years and up to 30 years with a grace period of 10 years. This will reduce the Greek debt by 25 billion euro between 2011 and 2020, which will diminish the debt-to-GDP by 10%.
- Third, we agreed upon and supported the voluntary involvement of private bondholders, with a menu of options (roll-over; exchange; buy-back) covering payments due up to 2020 . The voluntary participation of private creditors – of which we previously aware that this would be considered as “selective default”, and therefore cannot be considered as a surprise – is unique, unprecedented and restricted to Greece. PSI and debt buy back entail an estimated debt reduction estimated around 26 billions Euros or 12% of GDP
Arguably, Greek debt remains at high level, but much less exceptional if you compare it to the debt level for example in Japan which stands at over 225%. However, all together, these decisions will dramatically reduce the financial needs for Greece up to 2020, giving to the country the time needed to restore growth and recover market access. It will give the time needed to implement the deep reforms which are needed, starting with the savings and tax-collection measures the Greek Parliament voted a month ago. To this end, we also decided to extend huge administrative and technical help to Greece to ensure implementation. In addition, the Commission together with the EIB is front-loading and focussing our assistance on making the Greek economy more growth oriented.
At the last European Council in June the Latvian Prime Minister distributed his book on how Latvia had undergone successfully major economic challenges and managed to stabilise the situation, with the support of the EU and the IMF. In Belgium, my successors and I reduced my country’s debt-burden from over 130% in 1992 to around 85%¨in 2007. So it can be done. There are however two conditions: waste in the economy has to be eliminated, and growth has to be unshackled. If the laws adopted recently by the Greek parliament are implemented, and if our technical and investment assistance yields the expected results I think there is more than a fair chance for Greece to come through.
We wanted to put an end to speculation about the debt elsewhere in the Euro area. We did two things to that effect:
- First, we made it crystal clear that Private Sector Involvement (PSI) is a once-for-all. We understand that markets always fear the unilateral modification of the terms of contract, even if this is voluntary as is the case now with private creditors alleviating some of Greece’s debt burden. PSI will not be used in other cases. And anyway both Ireland and Portugal look well set on the way to recovery. To help them even further along this road, we decided as well to reduce the rate and extend the maturity of public lending to the same level as Greece is now benefiting from. In the case of Ireland this represents nearly a halving of their interest burden to around 4%.
- Second, we decided to refine and strengthen our tool box. To prevent healthy euro area economies from being cut off from funding through vagaries in the markets, we decide to allow the EFSF and the ESM to intervene on a precautionary basis, providing the possibility to draw on the resources if need be. Moreover we are willing to lend money to these countries as well in case they need to recapitalise their banks if these were to come under pressure. Finally we decided to allow the EFSF and the ESM to intervene in the secondary markets in exceptional situations to be assessed by the ECB. These new tools have been extensively discussed by public and press. Contrary to some commentaries, the EFSF has sufficient resources available to use these new tools to their fullest effect. And if ever additional resources were needed, Heads of States or government of the Euro area have reaffirmed that they stand ready to do all it the takes to safeguard the financial stability of the euro area. Decisions taken in the last year has shown that they deliver.
When taking these bold decisions, several countries have gone far beyond their traditional positions and red lines for the simple reason that the Euro and their own economies were at stake. Of course, one may have wished to take these steps earlier in the year. But these decisions represent deep changes to the euro area policy framework, triggering legitimate debates in a number of countries. In addition, what is important is the final outcome. Of course decisions for implementation will need to be taken by mutual agreement, but every time we have proven to be willing and able to take such decisions. I’m very confident that where needed national parliaments will approve of these new instruments rapidly. All will act in their own national self-interest.
Astonishingly, since our Summit the cost of borrowing has increased again for a number of euro area countries. I say astonishingly, because all macro economic fundamentals point in the opposite direction. It cannot be stressed enough that Greece is in a unique situation, not comparable to that of the other Eurozone countries. Italy will generate a primary surplus in 2011 and, with the additional austerity package just adopted will have a balanced budget in 2014. Spain has a low debt stock around 70%, below the EU and the Euro area average, and has taken courageous measures to reduce its deficit and boost growth. In all these cases, the current market assessment of risks are totally out of line with the fundamentals and it is ludicrous that CDS-rankings put these countries in the top tier of default risk countries.
Finally, it is imperative to bear in mind that this is not a crisis about the euro. In the aftermath of the financial crisis of 2008, all developed countries are faced with increased public debt. Given the interdependence of these economies, as we have clearly seen first hand in the European Union, it is in everyone’s interest that each country should find a solution to this burden, tailored to their own needs, which will have a direct effect on jobs and growth in the coming years. In light of this we are confident that the US will find a solution to their current stalemate for their own sake and for that of the stability of the financial market-at-large.
Economic growth has picked up in Europe and is on average 2.5% in Western European States. Those countries currently in loan programmes will see a return to growth in 2012. As soon as consumers and businesses see that debt levels and deficits are going down, this will have an extra positive effect of boosting consumer confidence and corporate investments. A win-win situation.