http://www.bloomberg.com/apps/news?pid=20601010&sid=aHW4vl.7NK40
Greece Gets $146 Billion Rescue in EU, IMF Package (Update1)
By Gabi Thesing and Flavia Krause-Jackson
May 3 (Bloomberg) -- Euro-region ministers agreed to a 110 billion-euro ($146
billion) rescue package for Greece to prevent a default and stop the worst
crisis in the currency’s 11-year history from spreading through the rest of the
bloc.
The first payment will be made before Greece’s next bond redemption on May 19,
said Jean-Claude Juncker after chairing a meeting of euro-region finance
ministers in Brussels yesterday. The 16-nation bloc will pay 80 billion euros
at a rate of around 5 percent and the International Monetary Fund contributes
the rest. Greece agreed to budget measures worth 13 percent of gross domestic
product.
“It’s an ambitious program, it’s austere but it’s absolutely necessary,”
Juncker told reporters. European Central Bank President Jean-Claude Trichet,
speaking at the same press conference, said Greece’s plan will “help to restore
confidence and safeguard financial stability in the euro area.”
Policy makers agreed to the unprecedented bailout after investors’ concerns
about a potential Greek default sparked a rout in Portuguese and Spanish bonds
last week and sent stock markets tumbling. At stake is the future of the euro
11 years after its creators left control of fiscal policy in national capitals.
Collateral Rules
The ECB, which was part of the bailout talks, said today it would accept all
Greek government debt as collateral when lending to banks, indefinitely
suspending minimum credit-rating thresholds. Further cuts in its credit rating
could have left Greek bonds barred from ECB lending after Standard & Poor’s
downgraded its debt to junk status on April 27.
The extra yield that investors demand to hold Greek debt over German bunds
narrowed 30 basis points to 564 basis points today, after surging to 826 basis
points on April 28, the highest since before the start of the euro in 1999. The
Portuguese spread narrowed 4 basis points to 209 after jumping to the most
since at least 1997 last week and the premium on Spain was little changed at
101 basis points.
The euro snapped three days of gains and declined to $1.322 from $1.3294 on
April 30. The single currency has lost 10 percent in the past six months on
concern the Greek crisis would spread and fell to a 12-month low of $1.3115 on
April 28,
EU Summit
European Union leaders will meet on May 7 to discuss the pace of parliamentary
approval of the Greek loans. Germany plans to debate the plan on the same day.
“The EU can afford to bail-out Greece and even Portugal, but it cannot afford
bailing out Spain,” said Andrew Bosomworth, Munich-based head of portfolio
management at Pacific Investment Management Co., which oversees the world’s
largest mutual fund from Newport Beach, California. “Therefore a lot is resting
on getting Greece right.”
Germany will provide 28 percent of the euro region’s overall contribution.
In return for rescue funds, Greece agreed to measures that the ADEDY civil
servants union called “savage.” Greece will cut wages and freeze pensions for
three years as well as increase the main sales tax to 23 percent from 21
percent. Progress will be monitored quarterly, the Greek government said.
“It is not an easy day,” said Finance Minister George Papaconstantinou in
Brussels. “It’s not going to be easy for Greek citizens. But it’s absolutely
clear that the Greek government is prepared to do what it needs to do.”
Three-Year Lifeline
The financial lifeline lasts three years and forces Greece to cut its budget
deficit below the European Union’s limit of 3 percent of gross domestic product
by the end of 2014, a year later than originally planned. The shortfall was
13.6 percent last year, the second-biggest in the region after Ireland.
Greece now expects its economy to shrink 4 percent this year and 2.6 percent
before returning to growth in 2012. The package will also set up a “financial
stabilization” fund to help banks with potential bad loans stemming from the
austerity measures. Ten billion of the total rescue package will be earmarked
for the fund, said EU Monetary Affairs Commissioner Olli Rehn.
Policy makers are trying to ringfence the Greek crisis after yields surged
across the euro region’s periphery on concern Spain, Portugal and Ireland will
also struggle to cut their deficits. S&P followed its decision to cut Greece’s
credit rating to junk on April 27 with downgrades on Portugal and Spain.
‘Special Case’
Rehn indicated that the Greek bailout plan can’t be seen as a blueprint for
other euro nations as Greece is a “special case” because of the way previous
governments fudged its deficit statistics.
At 11.2 percent of GDP, Spain’s budget deficit was the third-highest in the
euro region last year and Portugal’s was the fourth-biggest at 9.4 percent.
Asked about contagion risks, Austrian Finance Minister Josef Proell said
yesterday’s agreement “will send a clear signal to the markets that Europe is
able” to handle the crisis and “minimize the risk” of it spreading.
The Greek bailout marks an end to nearly three months of debate among EU
leaders on whether and how to rescue a euro region nation teetering on the
brink of default. German Chancellor Angela Merkel has been reluctant to put
taxpayers’ funds at risk as her government faces a regional election in North
Rhine-Westphalia on May 9.
Popular Opposition
Fifty-six percent of Germans oppose giving Greece aid, calling such support
“wrong,” Bild am Sonntag reported, citing an Emnid survey. Germany hopes to
secure parliament’s approval for the plan by May 7.
Merkel yesterday said she was right to demand IMF involvement in the fund over
the objections of her European peers.
“Three months ago it would have been unthinkable that Greece would accept such
tough conditions,” she said in Bonn.
Greek Prime Minister George Papandreou is likely to face his own difficulties.
The austerity plan has sparked opposition in Athens, with the federation of
civil servants calling a 48- hour strike starting May 4.
“They won’t manage to enforce these measures,” said Pavlos Nikolaou, 39, who
runs a mini-market in Athens. ‘I don’t think this will be the end of measures,
they’ll have to announce more next year. Cutting salaries is also not what’s
going to solve Greece’s problems.”
“Implementation will now be investors’ foremost concern in the coming months,
and Greece will have to work hard to rebuild its reputation and regain market
confidence,” said Annunziata. “It will be an uphill struggle.”
To contact the reporters on this story: Flavia Krause-Jackson at
fjack...@bloomberg.netgabi Thesing in London at gthes...@bloomberg.net;
Last Updated: May 3, 2010 04:08 EDT
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