Greece, Out of Ideas, Requests Global Aid

''We drew up a plan, we took difficult and painful measures,” Prime Minister George A. Papandreou said in a nationally televised address. “But the markets did not respond.”
Greece was forced to make the request after investors shunned the country’s bond offerings because of concern about its runaway debt. Those worries intensified Thursday when the European statistics agency raised its estimate for Greece’s debt above the government’s most recent figures, pushing the yield on Greek bonds to nearly 9 percent.
At that point, the need for international funds seemed a certainty, and Mr. Papandreou made the request while on a visit to Kastellorizo, an island in the Aegean Sea.
The financing will come from an emergency aid package arranged two weeks ago in Brussels in which Greece’s euro zone partners pledged up to 30 billion euros ($40 billion) in loans to Greece. The International Monetary Fund is expected to provide an additional 15 billion euros.
Markets did not react significantly to the announcement because investors had already factored in an expectation that Greece would seek the financing.
The prospects of a Greek bailout has strained the solidarity of the euro zone — the 16 countries
that use the euro — with strong resistance coming from some countries, especially Germany. It has also raised concern that other struggling economies, like Spain and Portugal, might need a financial rescue.
“At some stage the euro area will arrive at a fork in the road,” said Gerard Lyons, chief economist at Standard Chartered Bank in London, “as some economies are structurally different to others.”
For Greece, the request for aid is likely to mean a deeper level of economic pain at home. It has few options for fueling growth, and will probably have to impose even deeper austerity measures than the ones that have already caused widespread protests by unions. The I.M.F. is almost certain to demand even greater deficit cuts.
For now, though, tapping into the aid package may help Greece meet its short-term debt. It needs up to 10 billion euros in May to cover redemptions, coupon payments and its primary government deficit, according to investors.
“This clearly buys Greece quite a lot of time,” said Julian Callow, chief economist at Barclays Capital in London.
But further out, Mr. Callow added, perhaps beyond 2011, “this doesn’t rule out some kind of rescheduling.”
That would involve negotiations with banks and bondholders in which Athens might try to reduce its obligations or push repayments further into the future.
The announcement means that money from the I.M.F. can be released once its board has approved the terms.
“We are prepared to move expeditiously on this request,” Dominique Strauss-Kahn, the I.M.F. managing director, said in a statement issued in Washington, where a meeting of the Group of 20 finance ministers is taking place.
The loans pledged by Greece’s euro zone partners are still awaiting approval by legislators in some countries. That includes Germany, which has Europe’s biggest economy, and where resistance to a subsidy for Greece has been the strongest.
Athens may end up receiving its money in bits and pieces from its partners rather than in a single check, said a European Union official, who spoke on condition of anonymity because he was not authorized to speak publicly.
The idea of bailing out Greece has been highly unpopular with German voters and may still face a legal challenge before that country’s Constitutional Court.
But the Finance Ministry in Berlin said the German government was “ready to act” to clear the way in Parliament.
“We in Germany are pledged to solidarity and we will show it,” said Michael Offer, a spokesman for the Finance Ministry. “We’re doing this to stabilize the euro, which means it’s also in our own national interest.”
French and German banks are among the biggest holders of Greece’s sovereign debt, and a default would weigh heavily on their balance sheets.
Still, with an important regional election approaching at home, Chancellor Angela Merkel said that the aid would be granted only after Greece had negotiated a new austerity program with the European Union, the European Central Bank and the I.M.F. — and after they had determined that Greece had no other options.
Those talks began this week in Athens and are expected to conclude in a matter of days.
“Only when these steps have been taken can we talk about aid as well as the kind of aid and amounts,” Mrs. Merkel said in Berlin. “It is not direct help from the government budget, but rather guarantees.”
Mr. Papandreou did not mention any new budget cuts in his remarks Friday. The government has already employed two austerity packages aimed at cutting spending and increasing revenue, which have fueled unrest from unions.
The yield on benchmark 10-year Greek government bonds initially fell to 8.1 percent Friday after the reports, before rising again to 8.7 percent.
The euro rose against the dollar after briefly touching the lowest point in a year early in the day, but then dipped again amid uncertainty over the timing of the aid.
For Greece, Spain, Italy, Ireland and Portugal, the financial crisis has highlighted the constraints of euro membership. Unable to devalue their currencies to help regain industrial competitiveness, and impelled by European Union fiscal agreements to meet certain budget targets, they are facing years of belt-tightening just when their economies could use a lift from additional spending.
Other countries like Germany, the Netherlands and Austria have kept deficits down while retaining an edge in global markets, in part by restraining domestic wage increases.
France lies somewhere between the two camps.
Mr. Lyons at Standard Chartered Bank said the long-term choices for the euro area appeared stark: either push on toward a political union, handing budgetary power to a central authority, or form a “two-speed” block.
The bailout package has raised a host of technical as well as political issues for the euro area, because the euro’s founding treaties insisted that no such step could be taken.
Berlin will raise its share of the money on the markets through KfW, the state development bank. Guarantees for those loans require approval by lawmakers.
In France, which is making the next-biggest contribution, the government has revised its 2010 budget to authorize a loan of up to 6.3 billion euros this year. French lawmakers will discuss the contribution next month.
“The process is under way,” the French economy minister, Christine Lagarde, said in Washington. “Everybody has to do their homework now.”