Saturday, 27 March 2010

EU approves emergency financing for Greece. Now comes the hard part

Following a German-French compromise proposal, the Council of European Union heads of government yesterday approved an emergency financing package for Greece, extendable to other member states. It is to consist of contributions from the International Monetary Fund and bilateral loans from EU members.

The statement they issued made it clear that this mechanism is to be used only if a member cannot finance itself on open money markets, and is meant only as a stopgap measure:

"This mechanism, complementing International Monetary Fund financing, has to be considered ultima ratio, meaning in particular that market financing is insufficient.... The objective of this mechanism will not be to provide financing at average euro area interest rates, but to set incentives to return to market financing as soon as possible."

Greek Prime Minister Yiorgos Papandreou declared it a victory for the EU as well as a national victory. "The European Union today found itself before an enormous challenge and stood up to it," Papandreou said on Thursday, which was Greece's independence day.

Greece has lobbied for this safety net since a summit convened on February 11-12 to discuss the Greek economic crisis, which has seen the country's spreads wander to record distances from the German bund and brought market opprobrium onto the euro. The March 25-26 summit was the third convention of EU leaders this year to deal almost exclusively with Greece.

Of perhaps equal importance to the EU decision was the announcement from European Central Bank President Jean-Claude Trichet of a one-year extension to Greek government bonds' acceptability as collateral. The bonds would have ceased to hold that status at the end of 2010, leaving many Greek banks in danger of a downgrade. Roughly half of Greece's 300 billion euros of public debt has been bought by high street banks.

With the emergency finance mechanism in place, Greek and EU attention will now focus on the root of the problem: the high cost of Greek government, which keeps producing deficits. Slimming administration and boosting private sector production are the difficulties that now lie ahead, and are likely to produce great social and political difficulties for the reformist government of Papandreou.

EU statement: http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ec/113563.pdf
Papandreou statement: http://www.primeminister.gr/2010/03/25/1420

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