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  • MARCH 13, 2011, 9:54 P.M. ET

Europe pact’s key points

WALL STREET JOURNAL

http://online.wsj.com/article/SB10001424052748704893604576198891644897616.html?mod=djemITPE_h

By CHARLES FORELLE And STEPHEN FIDLER

BRUSSELS—European finance ministers are meeting here Monday and Tuesday to discuss the fine print of a deal covering the euro zone’s bailout funds after euro-zone leaders vaulted over low expectations for an agreement that they hammered out in the early hours of Saturday morning.

Most of what was agreed Saturday morning—after a particularly rancorous discussion—had been resolved by finance ministers earlier in the year. That included a commitment to enhance the European Financial Stability Facility, the euro zone’s current bailout fund, so that it can actually lend the €440 billion ($611 billion) originally promised and a commitment to establish a new €500 billion fund to replace the EFSF, which expires in 2013.

But two fresh details were particularly noteworthy.

First, the leaders agreed that the bailout funds could buy bonds directly from governments, in the so-called primary market. Equally telling, they rejected the option of buying bonds from investors who currently hold them—that is, in the secondary market. That was a rebuff to Jean-Claude Trichet, president of the European Central Bank, which holds €77 billion of subprime government bonds on its own books and wanted to offload them.

The difference is crucial. Buying bonds in the primary market amounts to direct help to countries—it provides them with a buyer for their debt where there might not have been one. At the very least, that raises the price of bonds and brings down the interest rate the country issuing them has to pay. Buying bonds in the secondary market amounts to helping investors—a giant new fund arrives to take feeble euro-zone bonds off their hands.

Investors, which include banks around Europe, would have preferred the latter.

Second, the leaders agreed in principle that interest rates charged to countries for bailout loans should be lowered. This is a substantial turnaround from a year ago.At the time, they wrote: The objective of this mechanism will not be to provide financing at average euro area interest rates, but to set incentives to return to market financing as soon as possible by risk adequate pricing.»

Now, they have conceded that rates should be lowered—a reflection of the fact that high borrowing costs are both politically unpalatable for recipient countries and difficult to square with the notion of helping them emerge from their indebtedness.

At Friday’s meeting, Greece won a one-percentage-point reduction in its rate, bringing it below 5%. In the public markets, which aren’t very liquid, investors want 18% to lend to Greece for two years.However, Ireland’s prime minister spurned the deal because its price was an increase in Ireland’s 12.5% corporate tax rate.

Also agreed by the leaders, as expected, was a pact to improve the competitiveness of the euro zone’s more fragile economies, though in a form weaker than the version first aired by France and Germany.

The leaders also agreed to the so-called 1/20th rule, under which governments with public debt above 60% of gross domestic product would seek to bring the excess down by 5% every year.

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