Greece Asks For Financial Rescue
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ATHENS, Greece — Hobbled by exorbitant borrowing costs, Greece triggered an emergency aid plan Friday to draw cash from the International Monetary Fund and countries that use the euro – the first test of whether the EU is prepared to bail out one of its members.
The package has enough money to keep Greece from defaulting on its massive debts anytime soon. But Athens still faces years of painful cutbacks and questions about its long-term finances, raising worries that its troubles will affect other indebted members of the European Union and further harm the euro currency.
The three-year plan adopted in Brussels recently and hailed as a sign that Europe can cope with the crisis will provide Greece with loans: Euro-zone members will contribute $40 billion (euro30 billion) at interest rates of about 5 percent, while the IMF will chip in about $13.4 billion (euro10 billion) this year. Exact figures for the following years have not yet been made public.
European governments made the financial assistance available to fend off a Greek default, which would deal a serious blow to the euro currency, shake market confidence and inflict losses on banks that invested in Greek bonds. It also aims to keep Greece's troubles from spreading to other financially weak euro-zone governments, such as Portugal and Spain.
While the aid would stave off default for now, it raises more questions: Will other governments ask for a bailout, and will assuming the financial burdens of Greece mean shakier finances and higher borrowing costs for other euro-zone countries?
The German public, in particular, has been critical of extending assistance to Greece, as Germany recently emerged from years of stagnant growth that saw painful cuts to people's own pensions and social security benefits. Germany will be the biggest contributor of loans.
Greece is under no illusions that the plan will resolve all the problems of a country that has a debt of $400 billion (euro300 billion) and other serious fiscal issues. The nation needs to borrow about $72 billion (euro54 billion) this year alone. It's already covered about half that amount with bond and treasury bill issues, but has $11.3 billion (euro8.5 billion) worth of 10-year bonds maturing on May 19.
But Athens hopes the plan, which will allow it to refinance its debt, gives it breathing space to push through tough reforms. It is already implementing a harsh austerity program that cuts civil servants' pay, freezes pensions and hikes taxes.
"Our partners will assist us, immediately and decisively, in order to give Greece the safe haven that will allow us to rebuild our ship with sturdy and reliable materials. As well as sending a strong message to the markets that the EU is not playing and is protecting our common interests and our common currency," Prime Minister George Papandreou said. "We are on a difficult course."
Papandreou – whose center-left government came to power in October and has blamed the previous administration for mismanaging the economy and fudging Greece's statistics – said the current market situation made it "a national and pressing necessity for us to formally ask our partners for the activation of the support mechanism."
Greece's efforts to pay are clouded for the long term because its prospects for economic growth are weak and because, as a euro member, it no longer has its own currency to devalue. Doing so is a painful but quick safety valve that can improve a troubled country's trade competitiveness.
Athens had faced ever-increasing borrowing costs, which reached nearly 9 percent for 10-year bonds on Thursday – about three times what EU heavyweight Germany has to pay.
The record highs came after the European Union's statistics agency revised the country's 2009 deficit figure to 13.6 percent of gross domestic product, from an already high 12.9 percent, and said it could be further revised by up to 0.5 percentage points more. A downgrade of the country's sovereign rating by Moody's credit agency made things worse.
"The activation of the bailout funds was highly expected, and it should result in an easing of the pressure on the Greek government," said IHS Global Insight senior economist Diego Iscaro.
"However, we are concerned that bond yields will still remain high," he said, noting that the exact details of the plan's implementation were still unclear and that "markets will still be concerned about the long-term sustainability of Greece's public finances."
EU spokesman Amadeu Altafaj Tardio said finance ministers of the 16 euro nations now will likely meet "in a matter of days" In Washington, IMF head Dominique Strauss-Kahn said the fund was "prepared to move expeditiously."
Greek trade unions reacted with dismay and vowed to step up strike action.
"Social resistance and accelerated strike action form the course that can provide hope and certainty in our life," said Spyros Papaspyros, head of the umbrella civil servant union. His union, ADEDY, planned a protest against the IMF on Tuesday.
More than 2,000 people took part in a demonstration in central Athens Friday evening against the prospect of further austerity measures. Minor clashes broke out when some demonstrators threw stones at riot police, who responded with pepper spray. Officers detained about 10 people.
German Chancellor Angela Merkel, who had resisted bailing Greece out, stressed that any assistance would be tied to "very strict conditions," including a savings plan drawn up in talks between Greece and the IMF and the approval of the European Commission, the European Central Bank, and the IMF.
Germany will contribute the largest share, $11.2 billion(euro8.37 billion), because it holds 27.92 percent of the shares of the European Central Bank.
But Merkel defended the assistance, calling it necessary to ensure the stability of the euro zone.
Italian Finance Minister Giulio Tremonti urged Germany to show its leadership on the Greek crisis, saying helping Greece is in the interest of the common European good.
"If the house of your neighbor gets set on fire, even if it is a small house, and even if the fault is your neighbor's, it's not a good idea to pretend nothing is happening," he told RAI state television from Washington. "It's better for you ... to give them a fire extinguisher because if not, the fire can spread to other houses."
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Associated Press writers Melissa Eddy in Berlin, Martin Crutsinger in Washington, Robert Wielaard in Brussels and Derek Gatopoulos and Nicholas Paphitis in Athens contributed to this report.
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ELENA BECATOROS 04/23/10 06:14 PM ET Associated Press