http://www.bloomberg.com/apps/news?pid=20601087&sid=aKWUaZBJUH0...


Greek stocks and bonds rallied and the euro gained after European governments offered the debt-
plagued nation a rescue package worth as much as 45 billion
euros ($61 billion) at below-market interest rates.

Forced into action by a surge in Greek borrowing costs to an 11-year high, euro-region finance ministers said yesterday they would offer as much as 30 billion euros in three-year loans
in 2010 at around 5 percent. Its three-year bond yields plunged
90 basis points to 6.18 percent. As much as 15 billion euros
would also come from the International Monetary Fund.

“This is a huge amount,” said Stephen Jen, managing director at BlueGold Capital Management LLP in London and a former IMF economist. “This is more than a bazooka. They have
gone nuclear on the issue of Greece. In the short run, the
market is short Greek assets so we’ll get a rally in those.”

With the euro facing the stiffest test since its debut in 1999, the 16-nation bloc maneuvered around rules barring the bailout of debt-stricken countries, aiming to prevent Greece’s
financial plight from spreading and to mute concerns about the
currency’s viability. Germany also abandoned an earlier demand
that Greece pay market rates.

Bonds Surge

The yield premium investors demand to hold Greek 10-year debt instead of benchmark German bunds dropped 67 basis points to 331 basis points as of 9:58 a.m. in London. Greece’s
benchmark ASE Index climbed 4.8 percent, led by National Bank of
Greece SA. That would be its biggest one-day gain since Feb. 9.

The yield on Greece’s 2-year note fell 149 basis points to 5.67 percent, the biggest one-day decline since at least 1998 when Bloomberg began collecting the data. Credit-default swaps
on Greek sovereign debt tumbled 69 basis points to 357, the
largest single-day drop ever, according to CMA DataVision
prices.

The euro rose as much as 1.4 percent to $1.3629. The single currency has dropped 4.9 percent against the dollar this year as the discord within Europe over the response to the Greek crisis
sapped faith in Europe’s economic management.

Bond investors’ response will determine whether Greece needs to tap the aid, a Greek Finance Ministry official said in Athens yesterday. Finance Minister George Papaconstantinou said
the government plans to go ahead with debt sales, including a
dollar-denominated bond, without taking up the offer for aid.

Beyond 2010

The package “sends a clear message that nobody can play with our common currency and our common fate,” Greek Prime Minister George Papandreou told reporters in Larnaca, Cyprus.

Yesterday’s teleconference of euro-region officials, which included European Central Bank President Jean-Claude Trichet, left open just how much Greece might need in 2011 and 2012, the
final years covered by the package.

“It shows there is money behind this,” Luxembourg Prime Minister Jean-Claude Juncker told reporters in Brussels yesterday after chairing the conference call. “The initiative
for activating the mechanism rests with the Greek government.”

Europe’s contribution would represent about two-thirds of any aid, with the IMF chipping in the rest, European Union Economic and Monetary Commissioner Olli Rehn said.

“We cannot speak on behalf of the IMF, but we know that they are ready to cooperate and contribute with a substantial amount,” Rehn said. Greek, EU and IMF officials will meet today
to start working on details.

IMF ‘Ready’

The IMF was “ready to join the effort,” Managing Director Dominique Strauss-Kahn said an in e-mailed statement, without giving more details on the IMF contribution.

European rhetorical support in February and March failed to prevent Greek 10-year bond yields from soaring to 7.51 percent on April 8, according to Bloomberg generic prices, amid concern
that Papandreou’s government will be swamped by its bills.

The jump in Greek yields to the highest since December 1998 helped overcome resistance to an aid package in Germany, which as Europe’s biggest economy would contribute almost a third of
the loans, the largest single share.

Germany “has lost the competition,” said Carsten Brzeski, an economist at ING Group in Brussels who used to work at the European Commission. “All that fuss and talk about not putting
taxpayer money at risk has been made obsolete.”

In the compromise hammered out yesterday, the European loans would be tied to Euribor and priced above rates charged by the IMF, a nod to German opposition to subsidizing a country
that lived beyond its means. The EU will offer a mix of fixed-
rate and floating-rate loans.

Record Deficit

The IMF would charge less than the EU. Both types of funding would be offered at the same time, Rehn said. Transfers to Greece would be made by the ECB.

Greece last week raised its estimate of the 2009 deficit from 12.7 percent of gross domestic product to 12.9 percent, the highest in the euro’s history and more than four times the EU’s
3 percent limit.

While rules dictated by Germany in the 1990s foresee fines for countries that go over the limit, no penalty has ever been imposed. Germany also led the charge to loosen the rules in 2005
after three years of excessive deficits.

While all euro-region governments vowed to contribute, some would need parliamentary approval. Ireland, itself reeling from the financial crisis, would require “national legislation,”
Finance Minister Brian Lenihan said in an e-mailed statement.

No Request

The Greek government has yet to request a European lifeline, confident that this year’s planned budget cut of 4 percentage points will stem speculation that it is heading for
the euro region’s first-ever default. Fitch Ratings highlighted
that risk by shaving Greece’s debt rating to BBB-, one level
above junk, on April 9.

A combination of higher taxes, lower spending and salary cuts for public workers has prompted strikes and protests against Papandreou, a socialist elected in October on promises
of raising wages.

The EU showed no sign of demanding further Greek austerity measures. Rehn hailed the Greek government for implementing “a very bold and ambitious program.”

Greece needs to raise 11.6 billion euros by the end of May to cover maturing bonds, and another 20 billion euros by the end of the year to pay debt coupons and finance this year’s deficit.

The debt agency plans to offer 1.2 billion euros of six- month and one-year notes tomorrow, in a test of investor confidence.

The amount provided by European governments was larger than expected, said Erik Nielsen, London-based chief European economist at Goldman Sachs Group Inc., though approving money
transfers through national parliaments and disbursing the funds
on time remains an issue. He expressed concern about Greece’s
solvency in the longer term.

“I remain a tad worried about the process of making the money available in time as well as (very) concerned about the issue of longer term sustainability,” Nielsen wrote in a note
to investors.