In an effort to stabilize the widening European debt crisis, the International Monetary Fund (IMF), together with Eurozone countries, agreed to extend an unprecedented $147 billion (110 billion euro) bailout package to Greece in return for deep cuts to the country's budget.
Under the three-year agreement reached late Sunday, Greece would receive $105 billion (80 billion euros) in loans from other Eurozone members and $40 billion (30 billion euros) from the IMF. The planned rescue is the largest ever attempted by the IMF and a first for the 16-member Eurozone. It still requires final approval from national governments.
Also, the European Central Bank (ECB) said on Monday it would indefinitely accept the country's debt as collateral regardless of its credit rating. The ECB didn't release figures, but the value of Greek assets used as collateral in its liquidity-providing operations is thought to be worth tens of billions of euros.
Many observers felt the huge bailout was designed not only to support Greece, but to shore up confidence in the euro, which has come under fire by currency traders. Just a few weeks ago, EU countries offered only $40 billion (30 billion euros) to help Greece.
"Greece is functionally bankrupt," Katinka Barysch, an economist and deputy director of the Center for European Reform in London told The New York Times. "For most European officials and experts, it's not about fostering Greek growth, it's about the stability of the euro zone."
The bailout erases concerns that Greece won't be able to meet its immediate funding needs, specifically $8.5 billion in bonds maturing May 19. But it also raises questions about whether the government can survive the severe budget cutting measures it promised in order to receive the aid.
Some analysts aren't convinced even the attention-grabbing sum of $145 billion
(110 billion euros) will be enough to keep Greece afloat. It's still not clear the rescue package will cover all of Greece's needs over the next three years, meaning it may have to end up borrowing even more.
"The euro will remain weak and there'll be more bailouts," Marc Faber, publisher of the Gloom, Boom & Doom report, said in a Bloomberg Television interview in Hong Kong. "For Greece, it means terrific austerity and terrific recession."
The Greek government has promised to cut public-sector wages and pensions, raise the average retirement age, increase value-added taxes and excise duties and deregulate the labor market and industries. The steps are expected to save the state $40 billion (30 billion euros) through 2013.
The tough cuts are already meeting public resistance. In Athens on Saturday, tens of thousands joined a May Day protest in anticipation of the aid deal. Rioters threw Molotov cocktails at police, and marchers chanted "get out" to "the IMF and the European junta." Unions have vowed strikes to protest the deal.
The main opposition party, the conservative New Democracy Party, lashed out at the new budget cuts.
"This is an even heavier dose of the medicine that got us here in the first place and could kill the patient," said party leader Antonis Samaras.
European leaders continue to worry about the effect of the bailout on other fiscally-challenged European Union (EU) members, including Ireland, Spain and Portugal.
Last week, investors hammered government bonds of Portugal and Spain after Standard & Poor's lowered their credit rating one day after downgrading Greece's debt to "junk" status - a move that all but locked Greece out of capital markets.
The downgrades raised fears that the credit spigot could tighten for others with debt and deficit problems and spark a debt contagion that would vastly increase the bailout tab for Europe's healthier nations.
Ireland had the highest budget deficit last year among euro-zone countries at 14.3% of gross domestic product (GDP), followed by Greece at 13.6%. Spain's budget deficit was the third-highest in at 11.2%, while Portugal's budget deficit stood at 9.4% of output.
The IMF's Poul Thomsen said the austerity plan was designed to "shock and awe markets and re-establish confidence." Standard & Poor's said that the package provides Greece with "significant breathing space" to improve its public finances.
But others felt that the markets would move against other countries, to see if the Europeans have the will and the funds to protect them.
"Unless Portugal and Spain proactively take additional measures to bolster their fiscal and growth outlook, markets will be tempted to test whether the EU has appetite for any further rescues after the breathtakingly large commitment made to Greece," Marco Annunziata, chief economist at UniCredit Group in London told Bloomberg News.
On Monday Greek bond markets rose sharply as investors warmed to the rescue package that means the country no longer has to tap the private markets for funds.
However, the Greek stock markets and the euro fell in a sign that there were still worries among investors about how the country's public debt crisis would play out.
"Greece is a Lehman Brothers for the sovereign world," Robin Marshall, who helps oversee $20 billion as director of fixed income at Smith & Williamson Asset Management in London, told Bloomberg. "A 100 billion euro package is a big amount and it might help to buy Greece some breathing space, but as an investor I'm still cautious."
News & Related Story Links:
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EU Bets $146 Billion Greek Bailout to Avert Contagion - Wall Street Journal:
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Debt Contagion Fear Spreads in Europe as S&P Lowers Eurozone Credit Ratings - Money Morning News Archive:
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