Saturday, October 2, 2010

Greece requests EU-IMF rescue in Euro’s biggest test

Greece called for activation of a financial lifeline of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro's stability and European political cohesion.The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels that undermine efforts to cut a budget deficit of more than four times the EU limit. Greek bonds and stocks rallied after the announcement.
"There was no response from the markets, either because they didn't believe in the political will of the EU or because they decided to go on with speculation," Papandreou said today. "The situation threatens to demolish not only the sacrifices of the people but also the regular course of the economy. All the efforts by the Greek people are in danger of being in vain."
With national debt of almost 300 billion euros and investors demanding almost triple what they charge Germany for its 10-year bonds, Greece faces a fiscal mess that threatened to spread to Spain and Portugal, forcing the EU to set up a standby aid facility. At stake is the future of the euro 11 years after its creators gave the European Central Bank responsibility for interest rates while leaving budget policy in national capitals.
Rating Cut
The request came one day after the yield on the country's benchmark two-year note topped 11 percent, nearing that of Pakistan, and Moody's Investors Service lowered Greece's creditworthiness by one notch to A3, saying it was considering further cuts. After Papandreou's announcement, the 2-year yield declined 82 basis points to 9.41 percent.
The euro, which has slumped 7 percent this year as Greece undermined confidence in the single currency, rose from a one- year low yesterday of $1.3261 to $1.3311 today. Greece's ASE stock index gained 1.7 percent to 1892.32. The benchmark has shed almost a third of its value in the past six months as banks, the biggest holders of Greek bonds, slumped and concerns the crisis will lead to a prolonged recession hurt the rest of the market.
Activating the aid and turning over economic policy to EU and IMF oversight was "a new Odyssey for Greece," Papandreou said. "But we know the road to Ithaca and have charted the waters," referring to the return of mythological hero Ulysses to his island home.
One Roof
Economists including Harvard University Professor Martin Feldstein have said the single currency would falter because divergent economies couldn't fit under one monetary roof.
The Greek request needs approval from all 15 other euro- area countries including Germany, where surveys have shown public opposition to aiding Greece. BlackRock Inc., the world's largest money manager, has expressed concerns about a "backlash" from citizens in EU nations prepared to offer a lifeline.
"We want to see the EU countries really get behind it and see that they've gelled around the idea of providing this support at the government level, at the senior policy maker level," Curtis Arledge, chief investment officer of fixed income at BlackRock, said on April 13. "If you see the backlash, they need to get their people on board."
Discount Loans
The aid facility for Greece offers as much as 30 billion euros in three-year loans from euro-area nations this year at a below-market interest rate of around 5 percent. Another 15 billion euros are available from the IMF at even lower rates, EU officials have said. Greek officials started talks on April 21 in Athens with EU and IMF officials to set the conditions on funds before the loans are disbursed.
Those talks may last for at least two weeks. With Greece facing 8.5 billion euros of bonds maturing May 19 and little chance of tapping financial markets, Papandreou's request today could help speed distribution of the rescue funds.
"We are prepared to move expeditiously on this Request," IMF Managing Director Dominique Strauss-Kahn said today in a statement.
Under EU rules, governments must keep their budget deficits below 3 percent of gross domestic product. While the EU can penalize countries for breaching the limit, no nation has been sanctioned since the euro was introduced in 1999. Of the 16 euro region members, only Luxembourg and Finland had deficits within the limit last year.
Deficit Revisions
The government's deficit-cutting goal became questionable yesterday after Eurostat, the EU's statistics agency, revised up the 2009 shortfall to 13.6 percent of gross domestic product, and said it was considering a further revision to as much as 14.1 percent. The government in Athens had pledged to reduce the budget deficit by at least 4 percentage points of gross domestic product this year to 8.7 percent. When Greece first made that pledge, its starting point was a 2009 deficit of 12.7 percent. forced it now.
"The aid package will buy Greece time this year," said Colin Ellis, European economist at Daiwa Capital in London. "That's all that it has done. Greece still faces a herculean task to show that it can get its public finances in order and reduce its deficit."
Strikes, Protests
Greece's economy may contract 4 percent this year, twice as much as in 2009 and double the government's forecast, according to Deutsche Bank AG. After a wave of domestic protests against austerity measures, the government needs to raise almost 10 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 the deficit.
Greece failed to qualify for the euro area initially, joining two years later and only after understating its budget gap. With the euro, ECB interest rates that never exceeded 4.75 percent and EU funds to help build roads and airports, the country had economic growth of around 4 percent on an annual average basis -- one of the fastest in Europe -- until 2008 when Lehman Brothers Holdings Inc.'s collapse sparked a global financial crisis.
German Resistance
German politicians have expressed reluctance to aid Greece, citing the country's manipulation of statistics to qualify for euro entry and an EU treaty clause that prohibits bailouts.
Allies of Chancellor Angela Merkel, a Christian Democrat, criticized her for signing up to an April 11 European deal on the terms of any aid for Greece, saying she dropped an initial demand that subsidies be ruled out.
"Germany buckled under the pressure -- we shouldn't kid ourselves that such loans are anything but subsidies," Frank Schaeffler, deputy finance spokesman for Merkel's Free Democrat junior coalition partners, said at the time.
The Greek request for help also risks provoking a European fight with the IMF over control of the process, including the conditions. The rescue package covers three years and leaves open the sums of possible funding in 2011 and 2012.
The aid facility marked a compromise between French demands for the euro area to play the lead role and German insistence on involving the Washington-based IMF. On March 30, in a sign of the potential for conflict over supervision, IMF Managing Director Dominique Strauss-Kahn said his organization "will define the conditionality" of any rescue package for Greece.

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