Sunday, 11 April 2010

Greece poised to ask for IMF, EU money

Greece is poised to ask for financial assistance from the International Monetary Fund or the European Union within days, possibly hours, Greek and international media report. Greek Prime Minister Yiorgos Papandreou on Thursday asked the European Council of government leaders to finalise the details of a eurozone rescue package as quickly as possible. The leaders of the Eurogroup on Saturday held a teleconference to finalise technical aspects of how a bilateral loan system from other EU members to Greece would work, and with what interest rates. Reuters allegedly quotes a senior EU diplomat as quoting 5 percent, which is far below the current rate Greece pays on the market.

The interest rate has been a focal point of the European debate, because it determines the extent to which countries will be encouraged to fall back on EU government-to-government money, broadening the redistribution of wealth between member states, rather than facing the harsher judment of the markets. The Financial Times reported that "Germany was sticking to its demand that the eurozone portion of the loans would have to be made at or near Greek market rates." But on Saturday an official told Bloomberg that "Germany is prepared to give Greece loans at below-market interest rates, dropping its opposition to aid subsidies," as long as the rate remains above that of the IMF. The March 25 announcement of the bilateral loan facility for Greece said the loans would be "non-concessional".

The imminence of Greece's request is due to the fact that its borrowing rates rose to record rates on Tuesday and Thursday last week. As this post went to air, spreads between the German and Greek bonds stood at 393 basis points - almost four percentage points. The urgency to the Eurogroup stems from pressure on the euro resulting from fear of a Greek default on servicing its existing loans. Whereas the euro rallied on Friday following market interest in the aid package for Greece becoming reality, Bloomberg financial agency reports on an almost 11-month low for the euro against the dollar yesterday. Fitch's rating agency on Friday cut Greece's credit rating from BBB+ to BBB-, only one level above junk.

Greece needs 10-12 billion euros in new loans during May to refinance itself, according to the Economist. Finance Minister Yiorgos Papakonstantinou is to undertake a roadshow in the US during the last ten days of April to raise most of that money. Failing to do so, some analysts think, Greece will certainly need to ask for IMF and EU assistance then.

The Greek government is also to accelerate its timeframe for the structural reform of the economy. According to media reports, it will bring forward the reform of social security, privatisations and use of public property, the opening up of closed professions, the simplification of the procedure to open a business and reduction of bureaucracy, and the telescoping of the country's system of local government from over a thousand municipalities to 366, with an equivalent reduction in prefectures. This will effectively dismiss 15,000 contract workers, by some estimates, and save 1.8 billion euros a year.

The new timeframe was announced by Papandreou in an interview to the Sunday edition of To Vima. "I think the time has come to open up all the fronts," he said. "because I believe that we must do things now so that they will have an effect after two or three years."

Mega TV on local government:
Bloomberg on the falling euro: "April 10 (Bloomberg) -- The euro dropped to within one cent of an 11-month low against the dollar this week as rising yields on Greece’s debt fueled speculation the nation would default, damping investor appetite for the European currency."
Bloomberg on German aid terms:
Financial Times on the rescue package:
The Economist analysis:

Comment: How Germany drives Greece to default
Paul Krugman's NYT blog opens with this analysis on April 8: "The debt crisis in Greece is approaching the point of no return. As prospects for a rescue plan seem to be fading, largely thanks to German obduracy, nervous investors have driven interest rates on Greek government bonds sky-high, sharply raising the country’s borrowing costs. This will push Greece even deeper into debt, further undermining confidence. At this point it’s hard to see how the nation can escape from this death spiral into default."

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