European finance ministers triggered a record €110 billion ($147 billion) bailout for debt-stricken Greece on Sunday, May 2, when Athens committed itself to years of painful austerity.
After weeks of tough talk and procrastination due to fierce public opposition to handouts for the Greeks, German Chancellor Angela Merkel finally threw her full support behind the EU/IMF package, vowing to fight for parliamentary approval by Friday.
Euro zone ministers, meeting in emergency session, approved the three-year package of emergency loans and agreed the first funds would be released in time for Athens to make a big debt repayment to creditors on May 19.
In exchange for by far the largest bailout ever assembled for a country, Prime Minister George Papandreou announced further spending cuts and tax increases totaling €30 billion ($39.7 billion) over three years on top of tough measures already taken.
“It is an unprecedented support package for an unprecedented effort by the Greek people,” a somber Papandreou, wearing a dark purple tie, the color used for funerals in Greece, told a televised cabinet meeting.
Merkel called the program very ambitious and said she would work to achieve swift parliamentary approval of Berlin’s share — the biggest of any EU state at about €22 billion ($29.1 billion) out of €80 billion ($106 billion) — of the rescue loans.
“I’m going to work for the Greece program and its passage,” she told reporters in Bonn, adding it was essential for the stability of the euro single currency.
Euro zone leaders will hold a special summit on Friday to formally launch the rescue after obtaining parliamentary approval where necessary. International Monetary Fund chief Dominique Strauss-Kahn forecast the IMF board would approve its €30 billion contribution to the package this week.
Greeks have already taken to the streets to demonstrate against the austerity drive and past governments have backed off from reforms to defuse often violent protests. But Papandreou, a Socialist with a strong personal approval rating, has insisted the country must face the bill for years of drift and graft.
“These sacrifices will give us breathing space and the time we need to make great changes,” he said. “I want to tell Greeks very honestly that we have a big trial ahead of us.”
The first rescue of a member of the 16-nation euro zone aims to stem a debt crisis that has shaken financial markets, dented confidence in the euro and begun to spread to fellow euro zone weaklings Portugal and Spain. Berlin’s hesitancy has fuelled market panic.
The chairman of the Eurogroup of finance ministers, Jean-Claude Juncker, said that at Germany’s insistence, all ministers would discuss with their national banking sectors the possibility of voluntary contributions to the aid package.
Some €10 billion ($13.237 billion) of the overall amount was earmarked to help stabilize the Greek banking sector if necessary, EU Economic and Monetary Affairs Commissioner Olli Rehn said.
Asked whether a similar bailout would be available for other euro zone countries, Rehn told a news conference Greece was a particular case that could not be compared to any other state.
The euro zone loans will carry an interest rate of about 5 percent — just half the rate demanded by markets last week to buy Greek debt, but nearly 2 percentage points more than the rate on Germany’s benchmark bonds.
The European Commission and the International Monetary Fund will monitor Greece’s progress quarterly and loan disbursements will be tied to those reviews.
Telling angry Greeks to choose between the painful rescue or economic collapse, the government now aims to bring its towering budget deficit back to the EU limit by 2014, two years later than originally promised.
“These measures are tough and unfair,” said Stathis Anestis, a spokesman for private sector union GSEE. “They lead workers to misery and the country deeper into recession.”
Economists were more positive. “The aid package will help defuse the primary cause of concern for creditors which is the imminent risk of default,” said Lena Komileva, head of G7 market economics at Tullett Prebon. But she noted that there was still a question mark over political approval across Europe.
Underlining the challenge facing Merkel, German politicians voiced reluctance to approve the rescue. Social Democratic opposition leader Frank-Walter Steinmeier said his party would take a lot of convincing to support the bailout.
A conservative ally of Merkel demanded that Athens be put under stricter tutelage by sending a European Commissioner to oversee spending cuts and accounting. “We can’t give Greece any blank checks,” said North Rhine-Westphalia state premier Juergen Ruettgers, who faces election defeat next Sunday.
The Greek rescue dwarfs the previous record bailout. South Korea — a country with a population nearly five times that of Greece — obtained a $58 billion rescue package from donors including the IMF during the Asian financial crisis in 1997.
COLLAPSE OR SALVATION
Citing a choice “between collapse or salvation”, Finance Minister George Papaconstantinou announced a three-year public sector pay freeze, further cuts in civil servants’ benefits, higher sales and fuel taxes, an increase in the effective retirement age and reductions in pensions.
Papaconstantinou said the deal would cover a large part of Greek borrowing needs for the next three years. In return Athens promised to slash its budget deficit to the EU limit of three percent of GDP by 2014 from 13.6 percent last year.
Papaconstantinou said Greece’s public debt would soar to nearly 150 percent of GDP — a higher peak than forecast earlier — but start falling from 2014. Both he and EU and IMF officials insisted there had been no talk of restructuring Greece’s debts. Athens would return to commercial borrowing when “appropriate”, he added.
Economists say that if the rescue fails to calm markets, European countries could end up footing a bill of half a trillion euros ($650 billion) to save several other nations.
(Writing by Noah Barkin/Paul Taylor; Editing by Charles Dick)