Greece Faces `Unprecedented' Cuts as $159B Rescue Nears
Euro-region ministers agreed to a 110 billion-euro ($146 billion) rescue package for Greece to prevent a default and stop the worst crisis in the currency’s 11-year history from spreading through the rest of the bloc.
The first payment will be made before Greece’s next bond redemption on May 19, said Jean-Claude Juncker after chairing a meeting of euro-region finance ministers in Brussels yesterday. The 16-nation bloc will pay 80 billion euros at a rate of around 5 percent and the International Monetary Fund contributes the rest. Greece agreed to budget measures worth 13 percent of gross domestic product.
“It’s an ambitious program, it’s austere but it’s absolutely necessary,” Juncker told reporters. European Central Bank President Jean-Claude Trichet, speaking at the same press conference, said Greece’s plan will “help to restore confidence and safeguard financial stability in the euro area.”
Policy makers agreed to the unprecedented bailout after investors’ concerns about a potential Greek default sparked a rout in Portuguese and Spanish bonds last week and sent stock markets tumbling. At stake is the future of the euro 11 years after its creators left control of fiscal policy in national capitals.
The extra yield that investors demand to hold Greek debt over German bunds surged to 826 basis points on April 28 after Standard & Poor’s cut its rating to junk. It eased to 594 points on April 30 as signs of an agreement emerged. The Portuguese spread jumped to the most since at least 1997 last week and the premium on Spain climbed to the highest since March 2009.
The euro, which fell to a 12-month low of $1.3115 on April 28, strengthened to $1.3294 two days later.
European Union leaders will meet on May 7 to discuss the pace of parliamentary approval of the Greek loans. Germany plans to debate the plan on the same day.
“The EU can afford to bail-out Greece and even Portugal, but it cannot afford bailing out Spain,” said Andrew Bosomworth, Munich-based head of portfolio management at Pacific Investment Management Co., which oversees the world’s largest mutual fund from Newport Beach, California. “Therefore a lot is resting on getting Greece right.”
Germany will provide 28 percent of the euro region’s overall contribution.
‘Not an Easy Day’
In return for rescue funds, Greece agreed to measures that the ADEDY civil servants union called “savage.” Greece will cut wages and freeze pensions for three years as well as increase the main sales tax to 23 percent from 21 percent. Progress will be monitored quarterly, the Greek government said.
“It is not an easy day,” said Finance Minister George Papaconstantinou in Brussels. “It’s not going to be easy for Greek citizens. But it’s absolutely clear that the Greek government is prepared to do what it needs to do.”
The financial lifeline lasts three years and forces Greece to cut its budget deficit below the European Union’s limit of 3 percent of gross domestic product by the end of 2014, a year later than originally planned. The shortfall was 13.6 percent last year, the second-biggest in the region after Ireland.
Greece now expects its economy to shrink 4 percent this year and 2.6 percent before returning to growth in 2012. The package will also set up a “financial stabilization” fund to help banks with potential bad loans stemming from the austerity measures. Ten billion of the total rescue package will be earmarked for the fund, said EU Monetary Affairs Commissioner Olli Rehn.
Policy makers are trying to ringfence the Greek crisis after yields surged across the euro region’s periphery on concern Spain, Portugal and Ireland will also struggle to cut their deficits. S&P followed its decision to cut Greece’s credit rating to junk on April 27 with downgrades on Portugal and Spain.
Rehn indicated that the Greek bailout plan can’t be seen as a blueprint for other euro nations as Greece is a “special case” because of the way previous governments fudged its deficit statistics.
At 11.2 percent of GDP, Spain’s budget deficit was the third-highest in the euro region last year and Portugal’s was the fourth-biggest at 9.4 percent.
Asked about contagion risks, Austrian Finance Minister Josef Proell said yesterday’s agreement “will send a clear signal to the markets that Europe is able” to handle the crisis and “minimize the risk” of it spreading.
The Greek bailout marks an end to nearly three months of debate among EU leaders on whether and how to rescue a euro region nation teetering on the brink of default. German Chancellor Angela Merkel has been reluctant to put taxpayers’ funds at risk as her government faces a regional election in North Rhine-Westphalia on May 9.
Fifty-six percent of Germans oppose giving Greece aid, calling such support “wrong,” Bild am Sonntag reported, citing an Emnid survey. Germany hopes to secure parliament’s approval for the plan by May 7.
Merkel yesterday said she was right to demand IMF involvement in the fund over the objections of her European peers.
“Three months ago it would have been unthinkable that Greece would accept such tough conditions,” she said in Bonn.
Greek Prime Minister George Papandreou is likely to face his own difficulties. The austerity plan has sparked opposition in Athens, with the federation of civil servants calling a 48- hour strike starting May 4.
“They won’t manage to enforce these measures,” said Pavlos Nikolaou, 39, who runs a mini-market in Athens. ‘I don’t think this will be the end of measures, they’ll have to announce more next year. Cutting salaries is also not what’s going to solve Greece’s problems.”
“Implementation will now be investors’ foremost concern in the coming months, and Greece will have to work hard to rebuild its reputation and regain market confidence,” said Annunziata. “It will be an uphill struggle.”