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Euro rallies after Europe details aid offer to Greece

April 11, 2010 |  4:57 pm

The European Union’s proposed financial rescue package for Greece is having the desired effect, at least for the battered euro.

The common currency has rallied in overseas trading, reaching $1.366 at about 5 p.m. PDT, up from $1.35 on Friday and the highest since March 17. The euro on March 25 plunged as low as $1.327, its weakest level since May.

Euro-zone countries are trying to protect their currency -- and Europe's financial system -- by extending a lifeline to Greece, which is struggling under a massive debt load. The Greek government must refinance tens of billions of euros in bond debt in the coming months, but bond investors have been demanding ever-higher yields to buy existing Greek debt, threatening to make it prohibitive for the government to borrow.

The annualized yield on 10-year Greek bonds soared to 7.36% on Thursday, up from 6.54% at the start of the week and 5.52% in mid-January.

Parthenon By contrast, the U.S. Treasury last week paid 3.9% on $21 billion in newly issued 10-year notes.

Credit-grading firm Fitch Ratings on Friday cut its rating of Greece's debt to BBB-minus from BBB-plus. The new grade is Fitch's lowest investment-grade rating; the next stop would be a junk rating.

The European Union’s offer of $41 billion in loans would allow Greece to borrow at rates of about 5%. The Wall Street Journal calculated the cost at 5.33% for the fixed-rate loans in the package.

The loans from the other euro-zone countries, and a smaller aid package offered by the International Monetary Fund, aren’t automatic; Greece would have to request them. And so far, the Athens government says it wants to try to refinance its bonds on its own, forgoing outside help.

What it’s hoping is that the details of the lifeline will assure global markets that Greece now has a backstop in place to avoid a debt default, so that investors will rush into the market to buy the country’s bonds, thereby driving yields lower.

-- Tom Petruno

Photo: The Parthenon in Athens. Credit: Orestis Panagiotou / EPA