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Euro governments, IMF offer Greece 30 bln euro backstop
The International Monetary Fund stands ready to chip in another 10 billion euros, Olli Rehn, the EU monetary affairs chief, said Sunday.
The promise -- filling in details of a March 25 pledge of joint eurozone-IMF help -- was another attempt to calm markets that have been selling off Greek bonds in recent days.
In an emergency video conference, the finance ministers of the 16-eurozone nations agreed on a complex three-year financing formula that generates an interest rate of “around 5 percent.”
This is less than commercial market rates -- which have soared above 7 percent on Greek 10-year borrowing in recent weeks as the debt crisis dragged on -- but more than beneficiaries of IMF usually pay. European Central Bank president Jean-Claude Trichet and German Chancellor Angela Merkel have insisted that Greece not get below-market interest rates amounting to an EU subsidy for its past bad behavior. “This is certainly no subsidy” to Greece, Rehn told a news conference.
“The IMF stands ready to join the effort, including through a multi-year stand-by arrangement, to the extent needed and requested by the Greek authorities,” IMF Managing Director Dominique Strauss-Kahn said in a statement on Sunday. “An IMF team will hold discussions in Brussels on April 12 with the Greek authorities, the European Commission and the ECB.”
The test of Sunday’s announcement will be whether it restores confidence that Greece will not default and gives it a chance to borrow normally at lower rates. Under last week’s rates, Greece would have had to pay more than twice what Germany pays.
The danger is that interest payments themselves begin to sink the budget despite severe cutbacks imposed in recent days. A Greek default would be a serious blow to the euro, rattle markets and inflict losses on European banks that have bought Greek government bonds. Greek Finance Minister George Papaconstantinou said Greece had not asked for the plan to be activated, and still hoped to borrow on markets rather than seeking a rescue.
“The Greek government has not asked for the activation of the mechanism, even though this is already immediately available,” Papaconstantinou said in Athens. “The aim is, and we believe we will continue to borrow unhindered on the markets.”
European Commission President Jose Manuel Barroso said the pledge of cash for Greece showed the 16 euro-zone nations will defend Europe’s single currency and help a partner in trouble.
Downgrades, dumping bonds
Skepticism over Greece’s ability to manage its 300 billion euro debt pile, more than its 240 billion euro annual economic output, grew last week. Investors dumped Greek stocks and bonds, and ratings agency Fitch downgraded Athens’s debt by two notches on Friday.
Fitch lowered Greece’s credit rating to BBB-, the lowest investment grade just above junk, saying a deepening recession and rising debt service costs would make it harder for Athens to meet its budget deficit reduction target.
EU and IMF officials met on Monday to work out details of IMF and EU lending for 2011 and 2012, especially on amounts and loan conditions. Officials estimated that over a three-year period Greece was being offered a total of 80 billion euros in financial aid by the EU and the IMF.
Deflation awaits
IMF managing-director Dominique Strauss-Kahn said in a magazine interview the only solution for Greece in the longer-term was a painful period of deflation, in which wages and prices have to fall to regain competitiveness.
“The only effective remedy that remains is deflation,” Strauss-Kahn told Austrian magazine profil in an interview. “And that is exactly what the European Commission has correctly recommended.”
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