European governments will watch anxiously this morning to see how global financial markets react to a €120bn three-year bailout plan for Greece finally agreed in outline yesterday by Eurozone countries and the IMF.
The plan, which was being finalised by finance ministers in Brussels last night, is more concrete and vastly more expensive than previous, vaguer European bailout pledges which have failed to quell a concerted market assault on Greece – and the euro – in recent weeks.
Fear of a broader attack on other heavily indebted Eurozone countries, including Portugal and Spain, which could place the euro itself in jeopardy have finally forced the German chancellor, Angela Merkel, to swallow her objections to a Greek bailout. Ms Merkel said last night that she hoped to push the deal, which involves a new austerity pain for Greece, through the German parliament by Friday. Other German politicians warned, however, that parliamentary approval was far from a foregone conclusion.
The proposed bailout will give Greece almost €120bn in EU government and IMF loans over three years to replace the need for new borrowing at exorbitant market rates. This would be the first bailout of a Eurozone country and the biggest bailout of any country.
In return, the Greek government has agreed to slash its spending deficit from nearly 14 per cent down to 8.1 per cent this year by imposing even steeper cuts in public sector wages than previously introduced, lower pensions, and an additional two percentage-point rise in VAT to 23 per cent.
A depressed-looking Greek Prime Minister, George Papandreou, told a televised cabinet meeting in Athens: "It is an unprecedented support package for an unprecedented effort by the Greek people. These sacrifices will give us breathing space and the time we need to make great changes. I want to tell Greeks very honestly that we have a big trial ahead of us."
Many Greeks – and some economists in other countries – warn that the medicine is so strong that it could kill the patient and plunge Greece into a deep economic depression. Stathis Anestis, a spokesman for the private-sector union, the GSEE, said: "These measures are tough and unfair. They will lead workers into misery and the country deeper into recession."
For the last six weeks, the EU has been playing a game of chicken with financial markets. A half-dozen vague, but increasingly specific, pledges were made that Eurozone governments would "stand by" Greece.
The statements were supposed to scare speculators into ceasing to bet in bond and bond-insurance markets on a possible default by Athens.
Each time, the speculation abated for a while only to return more fiercely as the markets called the EU's bluff.
Each time the speculation increased, the cost of Greek state borrowing increased and Athens was pushed closer to default or insolvency.
Yesterday's deal was the first to dot all the i's and cross all the t's of loans, loan periods and conditions. Critics pointed out that a similar agreement a month ago might have cost the EU – and the Greek people – much less.
German officials say that the political conditions simply did not exist for Ms Merkel to sign a loan deal for Greece previously. Some European politicians, including the Franco-German Green leader, Daniel Cohn-Bendit, claim that Berlin welcomed the market speculation as means of pushing down the value of the euro.
The single currency has fallen, in recent days, to its lowest level against the dollar for more than a year. German exports, already healthy before the crisis, are now said to be booming.
Berlin and other EU capitals have been confronted in recent days, however, with a wider threat. The markets and debt-rating agencies have turned their attention to other heavily indebted EU countries, especially Spain and Portugal.
The success of yesterday's package will no longer be measured on whether the financial markets continue to bully Greece. EU governments are also desperately hoping that banks and hedge funds will realise that, ultimately, they are on to a loser if they bet on the default of any Eurozone country.
Details of the austerity measures
*Public sector pay cuts
- Public sector pay freeze extended until 2014.
*Additional tax measures
- The main VAT rate is increased by 2 percentage points to 23 per cent
- Excise taxes on fuel, cigarettes and alcohol are increased by a further 10 per cent.
- A new minimum wage will be introduced, applying to the young and the long-term unemployed.
- The retirement age, currently 65 years for men and 60 years for women, will be linked to average life expectancy.
- Minimum contribution period to qualify for full pension will be gradually increased to 40 years from 37 years by 2015.
- Early retirement will be curtailed, with a view to banning any retirement below the age of 60.
- Pensions will be cut, to reflect a pensioner's average pay over the entire working life rather than his or her final salary level.Reuse content