ATHENS // The Greek prime minister, George Papandreou, said last night that an EU agreement to cut the country's debt had given Greece the breathing room it needed to adopt reforms and it must seize the opportunity. "We must continue to work intensively to change everything that offends us," Mr Papandreou said in a televised address to the nation. "The crisis gives us the opportunity and the deal gives us the time to decide what is important for Greece."
European leaders reached agreement earlier yesterday and the deal appeared to have achieved what they set out to do as markets and international politicians reacted positively to the work done in Brussels to tackle the debt crisis in the single-currency Euro zone. But warnings abounded that they will have to hurry with the implementation and that more aggressive measures may yet be needed.
"Problems cannot be solved by waving a magic wand. It will require a follow-through," was the telling reaction of Robert Zoellick, head of the World Bank. He voiced the view of many observers and financial market analysts in urging further action, saying, "This basically buys time and you have to use that."
Meanwhile, leaders of some of the countries that are hardest hit by the debt crisis and that will need to implement harsh austerity measures, particularly Greece and Italy, set out to defend the package. "If we don't respect these commitments we won't be credible anymore," Italy's prime minister, Silvio Berlusconi, told reporters after the summit.
Like Mr Papandreou, France's president, Nicolas Sarkozy, defended the deal.
The World Bank's sister institution, the International Monetary Fund, is likely to be involved in the Euro zone's rescue fund, the now expanded European Financial Stability Facility (EFSF) giving it a say for the first time on a European level. One Brussels analyst noted that this sent a sharp political message to the international community.
"Having the IMF involved with the EU to save the EU as a region, in my view this is a serious political message, that the EU alone cannot solve its own problems," said Rim Ayadi of the Centre for European Policy Studies.
The European Union and Euro zone summit in Brussels that started on Wednesday concluded only in the early hours yesterday as Mr Sarkozy and Germany's chancellor Angela Merkel negotiated a deal with international banks to accept a 50 per cent writedown on Greece's debt.
The debt reduction, or haircut, was a crucial part of a larger package of measures designed to bail out Greece's heavily indebted economy, prevent contagion to other European countries, particularly Italy and Spain by boosting the EFSF, and propping up the EU's banks that hold much of the debt of those countries.
The immediate reaction of the markets was positive yesterday but widespread scepticism prevailed. The initial gains reflected a sigh of relief that the debt crisis had not exploded beyond control, rather than a belief in the sustainability of the package.
"What it has basically done is put off a disorderly, very messy default in Greece. Has it resolved the longer terms problems? I don't believe that it has," said Michael Hewson of CMC Markets, a London-based financial derivatives trading house.
He warned that the markets were now doubting whether the package would also be able to deliver growth, particularly in the hard-hit countries that are having to implement far-reaching austerity measures. "Policymakers need to have a growth strategy and at the moment all this has done is that it has delayed possibly another crisis for six months or maybe a year."
To allow the Greek economy to grow again, he foresees a further debt reduction for the banks, who may have to write off 75 per cent of the original value of the bonds rather than the now agreed 50 per cent. That expectation could undermine the effectiveness of the entire package as it stands now.
Both the World Bank and other commentators noted that the only way for Europe to get out of the debt crisis is to achieve economic growth, which almost stagnated this year. One way to help boost growth, said Mr Hewson, was for the European Central Bank to quickly cut interest rates by .25 per cent.
Even some analysts who had urged the current course of action on EU leaders acknowledged that this was an imperfect deal. Mrs Ayadi of the CEPS in Brussels repeated what for many is the crux of Europe's problem: "If you want to integrate you should integrate fully. If you have a political union and an economic union you should have a fiscal union, otherwise it does not make any sense."
But she also noted that European populations at the moment are reluctant to move to closer union, particularly as it may mean that wealthier, northern countries will be saddled with the debts of more profligate countries to the south. The current deal was the best that could be done under the circumstances, she said.
In the end, Europe may well end up paying a higher price because of its reluctance to move to closer union. "The more they delay bolder action, like fiscal union and so on, the more they will lose money," predicted Mrs Ayadi.
The deal also contained some positive aspects, she said, in particular the emergence of a public-private partnership to guarantee part of the new loans that will have to be made. Also it placed more of a burden on the banks.
"What is good in this deal is that the private sector is also bearing the cost. That is very important because up to today the banks were only taking money."
Even though European leaders had come under great pressure to reach a deal, there is no immediate deadline for all the details to emerge. Italy is likely to take several weeks to inform the other countries how it intends to implement measures to reduce its debt.
International reactions to the deal reached in Brussels are also crucial, as investors and governments from outside the EU are called on to help underpin the rescue effort. But, said Mr Hewson, with confidence low in the ability of Greece, Italy and Spain in particular to repay their debts, that hope may be partly in vain.
"If you are going to invest in these countries, most people are going to invest in infrastructure rather than debt."
foreign.desk@thenational.ae
with additional reporting by Reuters