Euro surges amid Greek deal hopes

Eurozone leaders are working on a draft proposal in Brussels, under which Ireland looks set to benefit from a cheaper interest rate on its EU loan, and a longer term to pay off the debt.

Eurozone leaders are working on a draft proposal in Brussels, under which Ireland looks set to benefit from a cheaper interest rate on its EU loan, and a longer term to pay off the debt.

The proposals, which would see the loan terms for Ireland, Portugal and Greece extended from seven-and-a-half to 15 years, also include an interest rate cut of up to 1%.

The deal is expected to be rubberstamped in Brussels later tonight, but already the value of the Euro has increased and stock markets are rallying.

German Chancellor Angela Merkel said European officials want to tackle the “root” of the crisis by easing Greece’s debt burden.

The deal, if approved, would better equip the currency union with tools to fight the debt crisis and make it easier for other indebted countries once their aid programs end.

The deal also includes aid from private lenders, which the European Central Bank had opposed as a kind of default by Greece. But the aid will reportedly come with a guarantee so that ECB aid for Greece can continue.

“If sealed and implemented, the measures can mark a turnaround in the EU’s management of its crisis,” said currency strategist Lena Komileva, of Brown Brothers Harriman in New York.

But she noted that important questions remained: The cost of the programme, and more broadly how Europe can help its most indebted countries improve their stagnant economies.

The euro rose to a two-week high of 1.4401 dollars. In afternoon trading, it was worth 1.4374 dollars, up from a low of 1.4137 dollars earlier in the day before the deal terms started emerging. Yesterday, the euro was worth 1.4229 dollars.

Euro trading has been volatile this summer as investors feared that the debt crisis would spread from Greece, Portugal and Ireland to the much bigger economies of Spain and Italy.

While the Europeans’ deal means they are making progress on their debt problems, the US “seems stuck with a stalemate and significant chance of a downgrade” because of the political impasse on lifting the debt limit, said GFT currency analyst Kathy Lien.

Without an agreement to raise the government’s borrowing authority, the US government could default on its debt, sending financial markets into chaos.

The dollar was broadly lower in other trading today. The British pound jumped to 1.6296 dollars from 1.6162 dollars. The dollar fell to 78.52 Japanese yen from 78.80 yen, edged down to 0.8184 Swiss francs from 0.8191 francs and dipped to 94.44 Canadian cents from 94.74 cents.

A draft of the deal said banks and other private business which own Greek bonds have agreed to contribute to the rescue of the country - language indicating that they will accept being paid back more slowly or at lower interest rates.

This could happen through banks trading their current bonds to Greece for new ones which mature years later. The banks could also sell their bonds back to Greece at a loss.

Ratings agencies have long warned that such measures would be seen as a form of Greek default on its loans, a first for a eurozone country and a potential cause of devastating loss of confidence in the other heavily indebted nations.

Markets appeared to be seeing the draft measures as less harmful than expected, however, fuelling the rally.

“Greece is in a uniquely grave situation. This is the reason why it requires an exceptional solution,” the draft said.

The deal, if approved, would also radically overhaul a bailout fund created last year to aid Greece as it found itself increasingly unable to sell bonds with the sharply higher rates demanded by investors frightened that the country’s stagnant economy would leave it unable to repay its debt.

The European Financial Stability Facility has loaned billions to Portugal and Ireland and has another €440bn in reserve but has required emergency summits of national leaders to authorise new aid.

The deal would now allow it to intervene pre-emptively, before a country is in full-blown crisis mode.

For instance, countries could be given a “precautionary programme” – likely to be some form of credit line. That might allow states under stress, like Spain, to continue raising money on the markets, giving an extra assurance to investors, and could also make it easier for Ireland and Portugal to re-enter the markets once their bailout programs expire.

Money from the EFSF could also be used in some situations to recapitalise banks in countries that have not yet been bailed out, the draft said.

On top of that, it adds, the EFSF could be authorised to buy up bonds of troubled countries on the open market, maintaining the prices of the bonds and keeping their interest rates from rocketing in the face of pressure from worried investors.

A eurozone official told The Associated Press that the draft was “definitely not final” and that “anything can change”.

A major fear about a potential Greek bond default has been the potential for massive disruption to the Greek banking system. Greek banks use Greek government bonds that they own as collateral for overnight loans they receive from the European Central Bank.

That money funds the banks’ day-to-day operations, including short-term loans to private businesses.

A default would render the bonds useless as collateral, causing that funding to dry up and wreaking havoc on the Greek economy.

To prevent that, the EFSF would provide some form of repayment guarantee or collateral for the new Greek bonds banks would take on.

According to the draft, the eurozone and the International Monetary Fund are also ready to give new rescue loans to Greece, without providing a number.

Eurozone leaders also plan to ease the loan conditions for their part of the bailout, by doubling the average loan maturity for Greece to 15 years from seven and a half years currently and reduce the interest rate to 3.5%.

Those softer loan conditions would also apply to Ireland and Portugal.

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