By Helena Smith
Prime minister George Papandreou says it is a ‘national and pressing necessity’ to call for financial rescue after Greece’s austerity measures failed to convince the markets
Its economy teetering on the brink of bankruptcy, Greece, today bowed to the relentless pressure of global markets and officially requested a €45bn (£38bn) bailout package from the EU and International Monetary Fund.
The unprecedented request for international aid from a eurozone member state came after weeks of high tension in Athens. The Greek government, which had desperately tried to avoid a bailout, caved in after soaring borrowing costs rendered funding of the country’s staggering public deficit and debt virtually impossible.
Addressing the Greek nation, prime minister George Papandreou said he had no other choice but to activate the emergency standby loans agreed barely 10 days ago, after months of indecisiveness over how to handle the debt crisis.
With the euro severely hit by fears of a sovereign default, Greece’s financial turmoil had sparked deepening concerns of monetary meltdown in the heart of Europe even as EU and IMF officials were in Athens finessing the fiscal package.
The activation of the fund now opens the way for the IMF, initially, to expedite the process of injecting Greece’s cash-starved economy with much-needed capital. Athens has to refinance €16bn of maturing debt by the end of May – a task it had found increasingly difficult to meet because of runaway interest rates which this week jumped to a record 8.3%, more than twice that paid by Germany.
The EU data agency, Eurostat, has added to the country’s woes by saying its budget deficit had reached 13.6% of national output last year, by far the biggest in the 16-member eurozone and even worse than the revised figure of 12.7% announced by the newly elected socialist government when it inherited the crisis last October. Following the news, Moody’s, the credit ratings agency, struck another blow by downgrading Greek debt for the second time in five months.
“We are asking for the activation of this plan today because we do not want our sacrifices to be in vain – all of our savings to be put towards interest rates,” said a government source. “Because of the turmoil in the markets caused by the realisation that the 2009 deficit, inherited by our government, was 13.6%, instead of 12.7%, now is the right time to activate the mechanism. With [its] activation … we will have cast aside all doubts that we will face any difficulties with funding- in the foreseeable future.”
Papandreou’s move was immediately welcomed by markets across Europe where stocks marked a sharp rise after weeks of uncertainty. The premium on Greek 10-year bonds fell 60 basis points to 8.2% on the news and the euro strengthened slightly against the dollar and the pound.
But the Greek government’s request is likely to also lead to calls for further austerity measures, demands that will almost certainly worsen public unrest in Greece.
IMF officials have already signalled that the ruling socialists will have to toughen their budget-reduction policies with more cuts and increased tax revenue, in addition to the €4.8bn worth of painful austerity measures already taken this year.
Greek trade unionists and civil servants who on Thursday walked off the job to protest the mere presence of the officials in the capital have unanimously proclaimed that further spending cuts and tax hikes will lead to a “social explosion” – a threat that inevitably will pile the pressure on a government that has been forced, against its will, to implement the cost-cutting policies.
The average Greek has suffered a 30% drop in income since the measures were announced. Anger over the IMF – whose intervention has been widely derided by Greeks – is already running high.
While it is hoped the bailout will preclude the possibility of bankruptcy not everybody is convinced. Analysts say much will depend on the conditions attached to an IMF handout – in contrast to the EU, the Washington-based body has yet to agree on the details of a deal.
Ireland recorded the largest budget deficit in the EU last year, eclipsing even Greece.
The Government’s debt ratio had shown as 11.8% of GDP, but has now risen to 14.3% for 2009, with the reclassification of the €4bn pumped into Anglo Irish bank as capital spending, to blame.
The same result is expected this year, because of the additional €8.3bn given to Anglo.
Now we know the truth. The financial meltdown wasn’t a mistake – it was a con