UOBSERVER / BRUSSELS – Eurozone states and the IMF have agreed a three-year lending package for Greece worth €110 billion. The decision taken by euro area finance ministers in Brussels on Sunday evening (2 May) follows months of market turmoil, during which Greece’s borrowing costs have risen to record highs, sparking fears of a sovereign debt default and breakup of the single currency area.
“It is an important day for the future of Greece and an important day for the financial stability and economic governance of Europe,” EU economy commissioner Olli Rehn said after the finance meeting.
Eurozone governments will provide €80 billion under the three-year deal (2010-12), with the first disbursement to be ready before a crucial debt deadline on 19 May when Athens is due to pay back roughly €8.5 billion to bond holders. Mr Rehn said installments will be subject to a system of “quarterly reviews”.
The agreement comes after ten days of talks between EU, IMF and Greek officials regarding the lending terms were wrapped up in Athens on Saturday, with the centre-left Greek government subsequently announcing a fresh round of tax increases and spending cuts as part of its bid to bring the budget deficit to below three percent by 2014. The deficit currently stands at 13.6 percent.
Addressing a special meeting of his cabinet on Sunday morning to discuss the new budget-reduction measures, Greek Prime Minister George Papandreou said: “Avoiding bankruptcy is a red line for our nation.” “I know that with the decisions today our citizens must suffer greater sacrifices. The alternative, however, would be catastrophe and greater suffering for us all.”
The measures include the scrapping of bonus payments for public sector workers, an end to increases in public sector salaries and pensions for at least three years, raising VAT from 21 percent to 23 percent, and increasing taxes on fuel, alcohol and tobacco by 10 percent.
The Greek parliament will debate the tough new measures this week, amid fresh government forecasts predicting a four percent contraction in the Hellenic Republic’s economy this year, with growth unlikely to return before the second half of 2011.
Eurozone governments are now rushing to pass national legislation to allow them to transfer funds to Greece, with Berlin hoping to secure parliamentary approval by Friday (7 May), the same day that European Council President Herman Van Rompuy will chair a summit of euro area leaders.
Luxembourg’s prime minister, Jean-Claude Trichet, told journalists the purpose of the leaders’ meeting was to “evaluate the situation in light of parliamentary procedures …and assess the impact of the Greek crisis on euro area governance.”
With talk of a potential debt restructuring doing the rounds, Greek finance minister George Papaconstantinou dismissed the idea that eurozone states may not receive the full value of their loans back, and insisted the austerity measures had been designed to minimise the hurt caused to the country’s lower earners.
“We have done what we can to maintain social justice under this programme,” he said.
Tens of thousands of Greek citizens took the streets over the weekend to protest against the latest round of austerity measures, with riot police using tear gas to disperse protestors. A third national strike in as many months is planned for Wednesday.
Despite TV images showing the civil unrest in Athens, Mr Papaconstantinou insisted a majority of citizens were behind the government efforts to bring its finances back into line, with investors now watching to see whether the budget savings measures can be implemented fully.
“If you look at the opinion polls, you will get a very profound sense of a need for change,” he said.
The euro area finance ministers also discussed the possibility of banks making a voluntary contribution to the euro area bilateral loans for Greece, with the idea being widely discussed in Germany.
“All ministers agreed that they should talk to representatives of their banking sectors in the various countries and see what voluntary conclusions the banks are prepared to draw from the Greek programme and the eurogoup decision,” Mr Juncker told journalists after the meeting.
At the recipient end of the €110 billion lending programme, €10 billion has been set aside for a financial stability fund in case Greece’s banking sector runs into difficulties.
As the Greek deal entered the final stages in recent days, analysts have increasingly turned their attention to other economies seen as vulnerable, with particular concern that contagion could spread to Portugal, Spain or Ireland.
European politicians have insisted however that other euro area states will not need to ask for a similar bail-out. “One cannot compare Greece to other countries because of the very precarious debt dynamics that Greece would face without these necessary measures and because of …profound statistical irregularities,” said Mr Rehn.