The tiny country that blew a big hole in the credibility of the euro finally nailed down the emergency loan package that some European countries think it did not deserve.
Finance ministers of the euro zone - the 16 European Union countries that share the euro - last night approved €30-billion of loans to debt-swamped Greece.
Without the bailout, Greece, which must roll over some €17-billion of bonds in the next six weeks, faced the prospect of defaulting on its debt, a move that would trigger a run on the currency and possible defaults in other financially weak EU countries.
The International Monetary Fund will also contribute a substantial amount, thought to be as much as €15-billion, to the package. The IMF's contribution would raise the total to €45-billion in the first year of the Greek salvage effort, assuming Greece asks for the loans.
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Economists said the loans looked substantial enough to support Greek bonds in the short term, but in no way would eliminate Greece's fiscal mess.
"This is just the beginning of an arduous adjustment process for Greece," said Marco Annunziata, economist in London for UniCredit. "The challenge of combining robust economic growth with draconian fiscal adjustment, both essential to reach debt sustainability, remains a formidable one."
The finance ministers stressed that the details of the package, such as defining the event that would trigger the flow of loans and under what conditions they could be withdrawn, had yet to be worked out. "This is a step of clarification that markets are waiting for," said Luxembourg Prime Minister Jean-Claude Juncker, who acted as chairman of the ministers' conference call. "It shows there is money behind this. The initiative for activating the mechanism rests with the Greek government."
Mr. Juncker and Olli Rehn, the EU's economic and monetary commissioner, were adamant that the 5 per cent interest rate to be charged on the loan was not a subsidy, even though it is well below current market rates of about 7 per cent. The rate, however, is above the level that is charged by the IMF.
Still, economists said the 5 per cent rate was no giveaway, noting that three other highly indebted EU countries - Ireland, Portugal and Italy - can still borrow 3-year money more cheaply. Mr. Annunziata said the Greek loan package "still provides a strong incentive for Greece to put its house in order and win back the market's confidence to at least the same extent that Ireland has."
Greece's financial crisis erupted late last autumn, when the new Greek government of Prime Minister George Papandreou revealed that the country's true budget deficit was twice the previous figure. At almost 13 per cent of gross domestic product, it is the EU's highest and more than four times the limit set by the EU's stability and growth pact.
As the shocking size of Greece's deficit and debt problems became apparent, Greek bond prices plummeted, sending yields in the opposite direction and raising the country's financing costs. Greece's debt crisis pushed the euro down as investors and speculators took the view that the Spain, Portugal and other ailing euro zone countries would get hit next. Some even predicted the eventual demise of the euro, noting that no common currency has survived without a political as well as economic union.
The euro has dropped almost 6 per cent against the dollar this year.
The currency crisis was quickly followed by a political crisis. The euro zone countries could not agree whether Greece should be bailed out - let alone where the money should come from and at what rates.
Germany above all was especially wary about delivering cash to Athens. It took the view that Greece was largely the author of its own misfortunes and should not, in effect, be rewarded for years of fiscal mismanagement and deception about the true size of its deficit. If emergency loans were to come, Germany was insistent that they not be subsidized.
But other EU countries wanted to help Greece for fear the Greek contagion would spread. "France wants to support Greece because it knows its own finances are shaky," Charles Wyplosz, professor of economics at Geneva's Graduate Institute, said in a recent note.
Last month, the EU and the IMF made it clear that they would be willing to provide loans to Greece in the event the country failed to raise debt itself. But details were not announced, allowing investor sentiment to worsen, rocking the euro yet again and sending Greek bond yields soaring after a brief respite. Last week, the cost to Greece of borrowing money rose to record levels. On Friday, Greece faced a full-blown financial crisis when ratings agency Fitch downgraded Greek government debt by two notches, to BBB-, putting it only on step above junk status.
In an interview published Sunday in Greece's To Vima newspaper, Mr. Papandreou made it clear that the rescue plan was a last-ditch effort to deter bond speculators. "The question remains whether this mechanism will convince markets just like a gun on the table," he said. "If it does not convince them, it is a mechanism that is there to be used."
Eric Reguly