Merkel stance over Greece expected to bring calm to Gulf markets

Gulf markets should shake off any aftershocks from the Greek debt crisis Angela Merkel made it clear the entire euro zone would stand behind the country.

Gulf markets are expected to shake off any aftershocks from the Greek debt crisis today. Jeffrey E Biteng / The National

Gulf markets should shake off any aftershocks from the Greek debt crisis today after the German chancellor Angela Merkel made it clear the entire euro zone would stand behind the debt-laden country.

Investor concerns that Greece could end up defaulting on its debts rocked markets from New York to London and Hong Kong to Sydney last week. In the US, the Standard & Poor's 500 Index at one point lost 1.7 per cent.

The shock waves reverberated across the globe. In London, the FTSE 100 Index lost 0.8 per cent and it was a similar story in Hong Kong, where the Hang Seng index dropped 3.2 per cent, while Japan's Nikkei 225 Index fell 1.7 per cent and Australia's ASX 200 Index lost 1.6 per cent.

But news at the weekend that the euro zone's major players Germany and France want a new rescue package for Greece to be agreed on as quickly as possible should help to calm investor fears.

"It's the end of the sell-off in the short term for most markets. The US markets are becoming more resilient on the assumption that there will be a plan for a Greek bailout soon with less concessions after the riots on the streets," said Haissam Arabi, the chief executive at Gulfmena Investments in Dubai. "With global equity markets and commodity prices having a strong correlation for our markets, we expect to see regional markets turn around."

Mrs Merkel tried to calm any lingering market concerns yesterday when she said the 17-nation single currency bloc would stand shoulder-to-shoulder with Greece. Aiding the country is "defensible" because a euro-area sovereign default would be uncontrollable, the German chancellor said . "The point is that we wouldn't be able to control an insolvency," she said.

Her decision earlier to retreat from demands that bondholders should be forced to shoulder a "substantial" share of any Greek rescue plan is expected to go a long way to ease market unease over a second bailout plan.

"We would like to have a participation of private creditors on a voluntary basis," Mrs Merkel said at a joint press conference in Berlin on Friday with the French president, Nicolas Sarkozy. "This should be worked out jointly with the ECB [European Central Bank] and there shouldn't be any dispute with the ECB on this."

Her remarks signalled a reconciliation between German calls for investors to help rescue Greece with warnings from the ECB and France that a compulsory move risked triggering the euro zone's first sovereign default.

Attention now shifts to Luxembourg, where European finance ministers gather to discuss the Greek crisis today and tomorrow, followed by a Brussels summit of EU leaders on Friday and Saturday.

"The finance chiefs will probably find an agreement that the IMF and the Europeans can pay out the next tranche to Greece, given that the key ingredients of the next programme are known," said Joerg Asmussen, the German deputy finance minister.

Last year, Greece became the first victim of the euro-debt turmoil when it accepted a €110 billion (Dh577.79bn) bailout package from the EU and IMF.

As the crisis deepened, Ireland and Portugal were forced to ask for substantial financial aid to keep their economies afloat.

Now Greece needs a second rescue package despite its government bringing in sweeping austerity measures.

"The aim is involvement of the private sector on a voluntary basis, and for that the Vienna Initiative, as it's called, is a good basis," Mrs Merkel said. "I think we can achieve something on this basis."

Echoing the Vienna plan, first used during the financial crisis of 2009, would involve encouraging creditors to roll over expiring bonds, buying time for Greece until its austerity programme shows results or until a permanent rescue fund kicks in from mid-2013.

A rollover involves reinvesting the proceeds from maturing bonds in new securities.

"This is a breakthrough," said Mr Sarkozy. "Finally we have found a solution for an involvement of the private sector on a voluntary basis. What we decided just now is precisely in the spirit of what was decided in Vienna."

Mrs Merkel now faces the task of convincing her own coalition government and the German public that private investors can be swayed to share the burden in Greece with taxpayers. Jean-Claude Juncker, the head of the Eurogroup of finance ministers, has warned that the Greek problem could spread to at least five other European countries, including Belgium or even Italy, if a second bailout plan failed to get off the ground.

"[A Greek bankruptcy] could prove contagious for Portugal and Ireland, and then also for Belgium and Italy because of their high debt burden, even before Spain," he said.

* with Bloomberg News and Associated Press