Greece and the wider eurozone scrambled back from the brink of disaster again yesterday as the outline of an IMF/eurozone rescue package emerged.
The Greek prime minister, George Papandreou, told his nation's parliament that it must accept the main condition of the emergency loans – which would mean a further €24bn (£20.8bn) austerity package of tax rises and reductions in public spending. The spectre of a Greek default has retreated, if only temporarily.
Mr Papandreou told Greek MPs: "The measures we must take, which are economic measures, are necessary for the protection of our country. For our survival, for our future. So we can stand firmly on our feet. It is a patriotic duty to undertake this, with whatever political cost, which is tiny faced with the national cost of inaction and indecision."
Some €45bn (£39bn) this year, and a total three-year funding of €120bn (£104bn), is said to be being organised by IMF, European Central Bank (ECB) and European Commission officials. Eurozone finance ministers will meet tomorrow to settle any outstanding issues, chaired by Jean-Claude Juncker, finance minister of Luxembourg.
Of the initial €45bn (£39bn), some €30bn (£26bn) is being provided though bilateral loans to Greece by individual eurozone members, €8bn (£7bn) being the German share.
The balance will come from the IMF. Jean-Claude Trichet, the president of the ECB, and Dominique Strauss-Kahn, the IMF's managing director, met Bundestag members earlier this week to plead for their support for the measures.
Markets were panicked earlier this week by fears that the rescue deal would not be concluded by the time Greece's next debt repayment falls due on May 19. Greek banks suffered a further blow as Moody's, the international credit-ratings agency, downgraded their creditworthiness.
The most potent risk to a sustained European economic recovery is a
"contagion" where the problems in Greece spread to other peripheral economies such as Portugal and Spain, and where Europe's banking system freezes up though fear of substantial losses on lending to Greece.
Throughout Thursday and yesterday, many European banks began to show reluctance to lend to each other, as they did in the first phase of the original "credit crunch" in 2007. Such a contraction of credit could quickly turn into another financial crisis and push the real economy into recession again. It would also provoke a widespread devaluation of the portfolios of government bonds held by banks, insurance companies and investment funds, and trigger a further crisis of confidence about the survival of the euro. Because of her size, Spain represents the biggest risk to the survival of the single currency. Hence the pressure on European leaders, particularly in Germany, to agree and fund a deal and end the "contagion".
Despite fierce opposition to bailing out Greece within Germany, Chancellor Merkel has continued to defy her critics and back the move, with President Sarkozy of France, who will meet his Cabinet today to approve their loan. Germany's bilateral loan to Athens ought to be cleared by the Bundestag next week.
Risks remain, however. The Greek unions and opposition groups have promised yet more protests and strikes in response to the proposal that the Greek retirement age be raised from an average of 63 to 67, and the abolition of the "13th and 14th month" pay packets, payable to public sector pay workers at Easter and Christmas. Complaints by German MPs about why they should pay for Greeks to retire early has been one of the more potent arguments against the rescue. Some in Berlin would prefer to see Greece default or to leave matters entirely to the IMF.
A summit of European Leaders to formalise the agreement is mooted for 10 May. Deutsche Bank Chief Executive Josef Ackermann is helping coordinate efforts by Germany's private sector to support a rescue package for Greece, aiming to raise €1bn (£870m).
Guido Westerwelle, the German vice chancellor, stressed the need for the private sector to be involved in supporting the Athens rescue effort. "I expect that, just as in Germany banks will participate in the consequences of the economic and financial crisis through the famous bank levy that we agreed upon in the government, so also in Europe banks will want to make their contribution and will do so."