Greece calls on EU-IMF rescue loans

[Loppan Torkel]

bbc

Spoiler :

Greece has formally asked for the activation of an EU-IMF financial rescue package to help pull the debt-ridden economy out of its crisis.

It had hoped that just the promise of EU support, agreed last month, would have been be enough to reassure markets and help its recovery.

But Greece's problems have continued to hit investor confidence in the euro and other European economies.

Eurozone countries will now provide tens of billions of euros in loans.

Earlier this month, a deal was agreed under which eurozone nations would provide emergency loans of up to 30bn euros ($40bn; £26bn) in the first year, with a further 10bn euros coming from the International Monetary Fund (IMF).

The European Commission and the IMF said they were optimistic that the exact details of a loan could be worked out quickly.

However, in Germany, where there has been public opposition to funding a bail-out, Chancellor Angela Merkel said any aid would come with "very strict conditions", including a credible savings plan.

The German finance minister, Joerg Asmussen, said his country was doing its bit: "The German side is ready to act with its part of the aid-package. I cannot say anything about the time frame, but originally it should need some two weeks."

'Safe harbour'

Prime Minister George Papandreou, on a visit the Aegean island of Kastellorizo, said the markets had not responded positively to Greece's austerity measures, designed to cut Greece's debts, as he had hoped.

Confidence in the Greece economy has continued to fall, pushing its cost of borrowing to record levels in recent days.

It was therefore now a "national and pressing necessity" to access the EU-IMF aid, and that he had asked Finance Minister George Papaconstantinou to make a formal request for the loan plan's activation.

"Our partners will decisively contribute to provide Greece the safe harbour that will allow us to rebuild our ship," added Mr Papandreou.

'Pressure on'

Greece has sent a letter to the European Commission, the European Central Bank and the Eurogroup representing other Eurozone countries "formally requesting the activation of the support mechanism".

There are still some hurdles to clear though, BBC Brussels correspondent Dominic Hughes says.

The German opposition SPD is demanding a full debate on their portion of the aid package which could delay any German contribution.

So the IMF may be called on to finance the first portion of the aid. The next immediate step will be for eurozone ministers to agree an interest rate for loans to Greece - which will be considerably lower than the 8% they are facing on the open market at the moment.

The BBC economics editor Stephanie Flanders said the clock was now ticking.

She said that several countries needed to get parliamentary approval for the plan, which would take some weeks.

She added that delays had already pushed up the amount needed to support Greece, and further pain could be in store.

Uncertainty remains

The euro rallied in late afternoon trade, rising 0.5% to $1.33.6.

The yield, or interest rate, on Greek 10-year bonds, fell to as low as 7.99% after Mr Papandreou spoke, after rising to nearly 9% on Thursday - its highest level for more than 10 years. It then crept back up to 8.66%.

The fall is a sign of a slight increase in confidence in Greece's ability to pay back its loans. But analysts said there was still significant uncertainty ahead.

"The market's relatively modest reaction to the news that Greece was formally requesting aid from the EU and IMF was a clear sign that the market still believes that Greece will be forced to restructure its debt even with a bail-out," said BNY Mellon's Simon Derrick.

"These concerns were hardly soothed by a comment from the European Commission that it was neither for nor against a restructuring."

In addition, attention has also been turning to other eurozone countries with large deficits in recent days.

BNY Mellon pointed out that Portugal had come under pressure on the markets this week, with the cost of its borrowing rising.

It also remarked that some investors had begun to pull out of investing in Portuguese debt in recent days. "It seems clear which domino currently looks in danger of falling over on the European table," Mr Derrick said.

But one of the members of the European Central Bank Governing Committee, Ewald Nowotny, said Greece's problems should not unsettle other eurozone countries.

He said: "The fiscal situation of, let's say, Spain and Portugal, cannot be compared with the situation of Greece. It should be made very clear that there is no economic basis for negative news about these countries and it should also show very clearly that we do no want to give space for speculation."

Spending cutbacks

The EU-IMF loans package has been put together to help pull Greece out of its debt crisis.

Greece is swamped by 300bn euros of debt and needs to borrow about 54bn euros this year alone.

In the middle of April finance ministers of the eurozone nations agreed to provide up to 30bn euros in emergency loans for debt-hit Greece should it ask for them.

At the time they offered a three-year financing programme at interest rates of about 5%, based on IMF formulas.

Meanwhile, spending cutbacks being introduced by Athens to restore its finances are being resisted.

On Friday, Greek riot police fired teargas as about 2,500 people marched through the streets of central Athens in protest at the country's austerity measures in the latest display of public opposition.

What does this mean for EU and Europe? It can't be good.. Will Spain, Portugal or Ireland follow?

 

[really]

And Germany says not without big cuts.

Ireland is still able to borrow - we are supposed to be contributing to the Greek bailout.

On Friday, Greek riot police fired teargas as about 2,500 people marched through the streets of central Athens in protest at the country's austerity measures in the latest display of public opposition.

You wonder what they think the alternative is.

 

[Loppan Torkel]

You wonder what they think the alternative is.

Swedish welfare perhaps?


I'm not sure if it's the EU or just the Euro-nations who'll pay for this.

 

[Till]

With an election coming up, Germany will likely settle for nothing that doesn't give it (and the other contributors) super seniority status. So it would be the other creditors who really pay the price for the bailout.
It's still a bad situation for the Eurozone, of course, as it doesn't look like there is enough political will left to see through the same rescue mission for a second time.

Spain's debt is still fairly low compared to GDP (53.2%) (Euro area 78,7%), so they still have some breathing space to get their finances in order.
Italy's external debt is only 58.21% of GDP, and their budget deficit was fairly modest at -5,3% (Euro area 6,3%), so as long as the Italians themselves keep the faith, they ought to be fine for a while longer.

Portugal is in trouble. though...

stats

 

[Verbose]

With an election coming up, Germany will likely settle for nothing that doesn't give it (and the other contributors) super seniority status. So it would be the other creditors who really pay the price for the bailout.
It's still a bad situation for the Eurozone, of course, as it doesn't look like there is enough political will left to see through the same rescue mission for a second time.

Spain's debt is still fairly low compared to GDP (53.2%) (Euro area 78,7%), so they still have some breathing space to get their finances in order.
Italy's external debt is only 58.21% of GDP, and their budget deficit was fairly modest at -5,3% (Euro area 6,3%), so as long as the Italians themselves keep the faith, they ought to be fine for a while longer.

Portugal is in trouble. though...

stats

Right, but Portugal is small by comparison to Italy and Spain, thus manageable.

General comment I've heard is that while Spain and Portugal have been pretty proactive in dealing with their problems - and seen doing it - Greece was worse off from the start, and despite the govt. cutting and pruning has been seen as merely reactive to whatever new twists in the situation.

 

[TrailblazingScot]

Why call it a loan, Greece will eventually default.

 

[Till]

Right, but Portugal is small by comparison to Italy and Spain, thus manageable.

General comment I've heard is that while Spain and Portugal have been pretty proactive in dealing with their problems - and seen doing it - Greece was worse off from the start, and despite the govt. cutting and pruning has been seen as merely reactive to whatever new twists in the situation.

I agree that Portugal could be managed, if it came to that, but it would be hard to sell another rescue to the Germans. Of the PIIGS, only Italy and Spain are important trade partners and both will have to slash their imports to save their economy.

 

[Terxpahseyton]

Ireland is still able to borrow - we are supposed to be contributing to the Greek bailout.

And than Greece for yours?

 

[The Imp]

Glad I didn't buy any NBG stock... yet.

 

[kronic]

This may well be the beginning of the end game for the Euro area. It should be clear by now that this crisis will either lead to further integration or to a breakup of the Euro area. And I don't dare to give probabilities for these events. The likelihood of a negotiated Greek default gets higher and higher as it turns out that Greece needs much more money than it can get from the current package.

Spain's debt is still fairly low compared to GDP (53.2%) (Euro area 78,7%), so they still have some breathing space to get their finances in order.

That's what the Spanish government says. But this is unfortunately wrong as the markets believe otherwise. The overall level of public indebtedness is indeed the only indicator for the health of the Spanish economic and public finance that still look good. All other indicators are extremely bad. The Spanish growth model went bust as the construction sector collapsed. The balance sheets of Spanish banks will soon look like a nightmare. Unemployment is sky high, so is private indebtedness. Spain's industry is totally uncompetitive, the trade deficit really huge. In such an environment, market participants don't seem to have much faith that the government can a) get the economy back on track and b) shrink the huge public deficit. And, as far as I know, the Spanish government relies on foreign demand for its bonds. So what the markets want is drastic action by the government. So far, the Spaniards seem to be in denial. At this point it looks like the Spanish case will be the mother of all crises in the Euro area.

Italy's position is indeed much better. The only figure that's worse is total public debt. On the other hand, trade balance is much better, the industry competitive, private debt low, savings rate high and much of Italian government debt is bought by Italians. Italy certainly isn't a case of fiscal irresponsibility in the last decade. If the crisis continues to spread Italy may be effected nontheless. But Spain will be first...

 

[innonimatu]

This may well be the beginning of the end game for the Euro area. It should be clear by now that this crisis will either lead to further integration or to a breakup of the Euro area.

Breakup! Hell will freeze over before europeans agree to all be part of a single state. And the euro works just as a currency peg system and will have the same fate those did in 1980s South America. And good riddance to both the euro and the common market. To the whole EU, in fact. I hope that the situation is stretched far enough for the whole thing to blow.

Anyway, the only thing I want to figure out is the best time to convert my euros to swiss francs. I have no intention of being among the victims of the end of the euro.

 

[Till]

This may well be the beginning of the end game for the Euro area. It should be clear by now that this crisis will either lead to further integration or to a breakup of the Euro area. And I don't dare to give probabilities for these events. The likelihood of a negotiated Greek default gets higher and higher as it turns out that Greece needs much more money than it can get from the current package.


That's what the Spanish government says. But this is unfortunately wrong as the markets believe otherwise. The overall level of public indebtedness is indeed the only indicator for the health of the Spanish economic and public finance that still look good. All other indicators are extremely bad. The Spanish growth model went bust as the construction sector collapsed. The balance sheets of Spanish banks will soon look like a nightmare. Unemployment is sky high, so is private indebtedness. Spain's industry is totally uncompetitive, the trade deficit really huge. In such an environment, market participants don't seem to have much faith that the government can a) get the economy back on track and b) shrink the huge public deficit. And, as far as I know, the Spanish government relies on foreign demand for its bonds. So what the markets want is drastic action by the government. So far, the Spaniards seem to be in denial. At this point it looks like the Spanish case will be the mother of all crises in the Euro area.

Italy's position is indeed much better. The only figure that's worse is total public debt. On the other hand, trade balance is much better, the industry competitive, private debt low, savings rate high and much of Italian government debt is bought by Italians. Italy certainly isn't a case of fiscal irresponsibility in the last decade. If the crisis continues to spread Italy may be effected nontheless. But Spain will be first...

Excellents points, and i can't really disagree, other than that i think Portugal is in a worse position than Spain. Granted, they didn't suffer a burst bubble, but had barely any growth in years, which is hardly better. Portugal has lower unemployment, but Spain's is to be expected after the bust. Their long term unemployment is equally bad (4,3%). I don't know about Portugal's financial sector, but everything else in your post can be applied to Portugal as well.

I'd say Spain is in high danger to get into a untenable position, whereas Portugal already is.

 

[Verbose]

Breakup! Hell will freeze over before europeans agree to all be part of a single state. And the euro works just as a currency peg system and will have the same fate those did in 1980s South America. And good riddance to both the euro and the common market. To the whole EU, in fact. I hope that the situation is stretched far enough for the whole thing to blow.

Anyway, the only thing I want to figure out is the best time to convert my euros to swiss francs. I have no intention of being among the victims of the end of the euro.

Why not US dollars? As investors shun risk like the plague, all small currencies will be penalized if the Euro implodes.

 

[gangleri2001]

Best usage of this icon ever.