Greece was forced to beg for a bailout from Europe and the International Monetary Fund (IMF) yesterday after revised deficit estimates and a second credit downgrade sent borrowing costs spiralling to all-time highs.
The plea came just weeks after eurozone member states agreed a bailout mechanism for Greece that, it was hoped, would preclude the need to use it. But from the idyllic Aegean island of Kastelorizo yesterday, George Papandreou, Greece's Prime Minister, said there was no alternative but to ask for help.
"The time that was not granted to us by the markets will be given to us by the support of the eurozone," Mr Papandreou said. "I have asked our partners to contribute decisively in order to give Greece a safe harbour ... to rebuild our ship of state."
The request for aid had a swift effect on the markets. The euro rose against the dollar, having tumbled close to a year low overnight. And the spread on 10-year bond yields – that is, the difference between the interest paid on Greek bonds and on those of eurozone counterpart Germany – came back down to 530 basis points, from Thursday's all-time high of 609 basis points.
Earlier this month, an agreement hammered out with the 16 eurozone members put together a €30bn (£26bn) emergency package of three-year loans with interest rates of 5 per cent. To supplement the deal, a team from the European Commission, the European Central Bank (ECB) and the IMF has been in Athens since Wednesday to negotiate terms for additional IMF loans worth up to €15bn.
In a letter to the commission, the ECB, and eurozone members yesterday, Mr Papandreou formally requested the activation of the loan mechanism. Before the funding can be released, the commission and ECB will need to rule that the request is valid, and the eurozone states and IMF will need to agree the loans. The IMF came out strongly in support of Greece yesterday. "We are prepared to move expeditiously on this request," its managing director, Dominique Strauss-Kahn, said.
It had been hoped that having the facility available would be enough in itself. But borrowing costs continued to spiral. And on Thursday, Athens' problems reached the point of no return when Eurostat, the EU statistics body, revised estimates of the Greek deficit up to at least 13.6 per cent of GDP – with the possibility of another 0.5 point rise – far higher than previous estimates of 12.9 per cent.
In response, Moody's cut its credit rating by a notch, to A3, and Greece's 10-year bond yield soared to more than 9 per cent, more than double that of Germany. Two-year bond yields – a barometer of market expectation on imminent default – ballooned from 8.26 per cent to 11.6 per cent.
Athens has no time to waste. Some €8.5bn-worth of bonds mature in May, and in total the government needs to raise €54bn this year to service its €300bn debts. Mr Papandreou's government has set out tax hikes and spending cuts aiming to slash the deficit by 4 percentage points this year and bring it back below the EU's 3 per cent ceiling by the end of 2012.
But it will not be easy. Greek civil servants held a one-day strike yesterday, disrupting public services including schools and hospitals. And a 3,000-strong march through the centre of Athens ended in a riot, with police letting off tear gas to subdue particularly obstreperous protesters.
Despite ostensible EU agreement on a bailout package, there are still marked tensions. After strong words early in the crisis, Germany's Chancellor, Angela Merkel, did finally agree to a deal. But on Thursday, Frank Schaeffler, from the Free Democratic Party that is the junior partner in Mrs Merkel's ruling coalition, reiterated calls for Greece to leave the eurozone if it fails to solve its debt problems. And earlier in the week, Axel Weber – who is both head of Germany's Bundesbank and a member of the ECB council – stressed that the bailout mechanism should be temporary only, and must be used to force through the necessary reforms. "The key lesson from Greece's case must be to take steps to ensure that such a situation does not repeat itself," he said. The bailout will ease the pressure on Greece, but will not solve its problems, Diego Iscaro, a senior economist at IHS Global Insight, said.
"The economic situation remains worrying," he said. "The government now needs to focus on delivering on fiscal targets for the year – which is going to be very difficult given the recent upward revision to the deficit."Reuse content