Euro Leaders Retool Aid Fund, Cut Greek Rescue-Loan Rates

Euro-area leaders widened the scope of their rescue fund to stamp out the debt crisis, authorizing officials to buy debt in primary markets if necessary, while cutting the cost of bailout loans to Greece.

The officials rejected Ireland’s bid for relief as Prime Minister Enda Kenny refused to yield to calls to raise its 12.5 percent company tax rate. Leaders will allow the facility to spend its 440 billion-euro ($611 billion) capacity, though it won’t be used to finance bond buybacks of debt-strapped states. A final agreement is slated for a summit on March 24-25.

“This is an important message on the political pledge of the euro members to fight for the euro’s stability,” German Chancellor Angela Merkel said in Brussels after the summit ended at about 1:30 a.m. today. “Everyone had to make a contribution. I hope that this will also be a good message to the world in terms of the euro as a major currency.” ....

The agreement broke a deadlock as European policy makers sought to extinguish a crisis that has raged for more than a year and frustrated unprecedented efforts to contain it. Bond yields in Greece and Portugal touched euro-era records this week, debt ratings of Greece and Spain were cut, and the euro recorded its biggest weekly drop since the first week of 2011.

The accord was unexpected, coming at the end of a session that began after 5 p.m. following daylong talks among the 27 European Union heads on a response to the uprising in Libya. Officials in Germany and France this week said they didn’t expect a comprehensive pact until the end of month summit.

Firewall

“I’m positively surprised, for a change,” said Andrew Bosomworth, a money manager at Pacific Investment Management Co. While the fund would not be large enough to fund bailouts should the turmoil spread to Italy and Belgium, “the agreement contains important elements of a firewall” that could stop the crisis worsening.

The new bond facility would help other indebted nations by acting as a backstop should a Greek restructuring spook markets and threaten to derail government bond auctions, he said.

An initial deal last night on a plan to tighten economic cooperation and boost competitiveness committed nations to enact budget rules into law, a core German demand, and paved the way for the final agreement at the end-of-month summit.

In return for the euro region acceptance of her conditions on controlling debt, Merkel swung Europe’s biggest economy behind plans to allow greater flexibility and firepower in the EU rescue fund, the European Financial Stability Facility.

Rating

The EFSF had been limited to spending about 250 billion euros due to reserves it had to hold for its AAA rating. The commitment wasn’t matched with detail as Merkel indicated states will increase their guarantees.

The provision to allow primary-market bond purchases will offer a lifeline to aid recipients in return for austerity commitments. A basic accord was also reached on the permanent safety net from 2013, the European Stability Mechanism, with a mix of guarantees and capital, she said.

Adding urgency to the talks, the leaders met amid speculation that Greece would be forced to restructure its debt and Portugal would soon be the third euro nation to need help.

Greek 10-year yields rose 6 basis points yesterday to 12.81 percent and similar-maturity Irish yields jumped 14 basis points to 9.65 percent. Greek securities plunged this week after Moody’s Investors Service cut the nation’s rating, already at junk, by another three levels, saying the probability of default had increased. Credit-default swaps on Greek government debt rose 8 basis points to a record 1,048 basis points.

Lower Greek Rates

Leaders made a provisional agreement to lower Greece’s interest rates of about 5 percent for aid by 100 basis points, and extend the repayment period of the loans to 7 1/2 years from three years.

Greek Prime Minister George Papandreou said the moves would save about 6 billion euros over the life of the loans.

“Greece has made major efforts, just look at the size of their privatization program,” French President Nicolas Sarkozy said. “We’re not asking Ireland to put up their corporate taxes to the European average, but to make some effort.”

With two weeks to the summit endgame, Merkel and Sarkozy clashed with Kenny over corporate taxes. They had insisted on a common corporate tax base as the condition for agreeing to ease the terms of Ireland’s 85 billion-euro bailout. Kenny rejected that position, calling it “harmonization of taxes through the back door.”

Irish Tax

Ireland’s main corporate tax rate is 12.5 percent, compared with an EU average of about 23 percent and even higher rates in Germany and France, which it has used to lure companies such as Hewlett-Packard Co.

The European Commission, the EU’s executive body, will present a proposal on a common corporate tax base in the coming weeks, the agency said. Ireland will think it over and come back to the rest of the EU within two weeks, Merkel said.

Talks on a deal for Ireland “will be difficult and detailed but I am convinced and remain convinced that there will be that we can find a way forward,” Kenny said.

With the debt crisis lapping at Portugal’s shores, Prime Minister Jose Socrates’s government yesterday announced new commitments on deficit reduction amounting to 0.8 percent of gross domestic product for this year.

The yield on Portugal’s five-year debt surged to a euro-era record of 8 percent on speculation that would soon be forced to seek a bailout. Portugal’s 10-year bond yields reached 7.70 percent on March 9, the highest since at least 1997.

Questions have also been raised about Spain, which was cut to Aa2 by Moody’s Investors Service on March 10 on concern about the cost of shoring up its banking system. Spain’s 10-year government bond yield was at 5.4 percent yesterday.

European Central Bank President Jean-Claude Trichet, who also attended the talks, said the “credibility” of the Portuguese government “seems to me considerably re-enforced by these measures, which are of substance. When you go through all the measures, you see they are very substantial.”