Third time lucky for the eurozone? (News Feature)

By Ben Nimmo Apr 11, 2010, 18:22 GMT

Brussels - The eurozone has tried and failed twice to convince markets that it is safe to lend to the Greek government; on Sunday, it hoped that the third time would be lucky.

Greece's finances, and the credibility of the euro as a whole, have been in the spotlight ever since the Greek government revealed in October that its predecessor had lied about its debts. Eurozone states are now desperate to restore their battered image, both to save Greece from default and to stop their currency falling further.

'Euro area member states have agreed upon the terms of the financial support that will be given to Greece, when needed, to safeguard financial stability in the euro area as a whole,' eurozone finance ministers proclaimed after a video conference on Sunday.

The Greek safety net consists of a promise by the International Monetary Fund (IMF) and euro states to lend massively to Athens - some 60 billion dollars in the first year alone - if it finds it can no longer afford to borrow anywhere else.

Greece has to borrow some 20 billion euros (27 billion dollars) on international markets this spring to keep its finances afloat. But lenders are charging such high risk premiums that Greek officials warn they cannot afford to keep on paying at that rate.

That has pushed euro leaders into a series of bids to reassure the markets and bring the rates down.

In February, they vowed at a snap meeting on the sidelines of a European Union summit to do whatever it took to keep the euro stable.

Markets ticked up briefly on the news, but then dropped as traders decided that the pledge was too vague to be credible - provoking the Greek government to call for a more detailed rescue plan.

'We need to put the loaded gun on the table to make sure that the markets will respond in a positive manner,' Greek Prime Minister George Papandreou said in mid-March as he upped the pressure on Brussels.

Euro leaders tried again on March 25, setting out a more precise system for how any rescue would be organised.

'As part of a package involving substantial IMF financing and a majority of European financing, euro area member states are ready to contribute to coordinated bilateral loans' in a rescue, they said.

Any such loans would be a last resort and set at a high enough price to make Greece eager to return to the markets, leaders agreed after Germany insisted that there should be no subsidized lending.

That promise initially reassured markets, with the euro climbing by more than two cents against the dollar by the beginning of April.

But then doubts set in as Greek officials were quoted as rejecting an IMF role and divisions between euro states over the pricing of any loan appeared. By Friday, the euro had wiped out all its post-summit gains, and the risk premium on Greek debt had topped 7 per cent.

That led to calls for an almost unprecedented emergency video conference of eurozone finance ministers before markets could re-open on Monday.

'The gun will be loaded now,' an optimistic Papandreou told Toi Vima newspaper on Sunday, just ahead of that conference.

And indeed, the meeting did at last set out the full details of the safety net: a three-year package, with 30 billion euros in the first year from the eurozone and some 15 billion euros from the IMF, with the euro aid carrying an interest rate of 5 per cent.

That is 'the step of clarification which the markets are waiting for: it shows them that there is money behind this,' eurogroup president Jean-Claude Juncker said after the talks.

The president of the European Commission, Jose Manuel Barroso, was similarly buoyant, saying in a statement that the deal 'shows that the euro area is serious in doing what is necessary to secure financial stability.'

But the real test of the deal is likely to come only on Monday, as markets open, and on Tuesday, when Athens is widely expected to launch a further bond issue.

And until then, the eurozone leaders can only hope that the third attempt to calm the markets, unlike the last two, will work.

'We took the decisions on principle during the two previous meetings ... This time we are laying down the details of the mechanism to be launched,' Juncker stressed.