Despite Sunday’s agreement by European finance ministers on an unprecedented three-year loan package, the euro fell as markets questioned whether Athens will be able to enforce extra austerity measures promised to secure the aid and fretted that other euro zone states may be vulnerable. In contrast to the euphoria that greeted past IMF rescues, Greek bond yields eased only slightly compared to benchmark German bunds, falling back to levels reached early last week.
The debt spreads of Portugal and Spain, seen as the next dominos to fall if markets are not convinced by the Greek plan, narrowed only modestly. “There’s a lack of conviction that this is the silver-bullet solution. The longer-term sustainability of this level of austerity has got to be open to question,” said Tony Morriss, senior currency strategist with ANZ Bank in Sydney.
Euro zone leaders will formally launch the first bailout of a member of the 16-nation single currency area on Friday and aim to secure parliamentary backing for national loan contributions by then. In return, Athens committed itself to further radical savings -- mostly on the public sector wage and pensions bill -- on top of three previous austerity plans that have already sent thousands of people into the streets in protest.
The centre-left daily Ethnos said the plan would mean five years of “asphyxiation” for the Greek people and a “violent modernization” for the economy, forecast to contract by 4.0 percent this year and 2.6 percent in 2011.
Even if the plan is fully implemented, it will leave Greece with a substantially higher debt mountain of more than 140 percent of national output in 2013 with a significantly smaller economy to pay it off.
Yet the Greek and euro zone finance ministers, European Commission and IMF officials insisted there had been no talk of restructuring Greece’s debts -- a standard IMF prescription when a country’s liabilities become unsustainable. “It doesn’t look like the market is convinced yet, that’s the story the euro is telling,” a European-based currency trader said.
