Greece Calls for Activation of Financial Rescue Package

Greece Calls for Activation of Financial Rescue Package
By NIKI KITSANTONIS and MATTHEW SALTMARSH
Copyright by The New York Times
Published: April 23, 2010
http://www.nytimes.com/2010/04/24/business/global/24drachma.html?hp


ATHENS — Describing his country’s economy as “a sinking ship,” the Greek prime minister formally requested an international bailout on Friday, an unprecedented step that will test the bonds of the European Union.

In a nationally televised address, Prime Minister George Papandreou said two waves of austerity measures introduced by the government over the past few months “had failed to convince the markets” that Greece would get its finances under control or be able to avert defaulting on a mountain of debt.

“There is the risk of the sacrifices of the Greek people being lost as rates of borrowing continue to rise,” he said, speaking from the Aegean island of Kastellorizo.

“The time has come for us to ask our partners in the E.U. to activate the mechanism we formulated together,” he said, referring to an emergency aid package arranged two weeks ago. The plan foresees up to €30 billion, or $40 billion, in loans from Greece’s euro-zone partners, as well as up to €15 billion from the International Monetary Fund.

The activation of the E.U.-I.M.F. rescue plan, Mr. Papandreou said, “will send a strong message to the markets that the E.U. is not playing their game and will not leave its currency at risk.”

The announcement means that money from the I.M.F. can be expedited once the board of the fund has approved the terms. The fund is expected to provide €12 billion, according to E.U. officials.

“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.

The loans pledged by Greece’s euro-zone partners are still awaiting approval by legislators in some of the countries. French lawmakers, for example, will discuss France’s 21 percent contribution early next month.

In Germany, the bailout has proved to be politically unpopular and could face legal challenges before the country’s Constitutional Court.

The Finance Ministry in Berlin said that the E.U. and I.M.F. must first agree that the aid is needed as a last resort. But he said the German government is “ready to act” to clear the way in parliament.

“We in Germany are pledged to solidarity and we will show it,” Mr. Offer told reporters. “We’re doing this to stabilize the euro, which means it’s also in our own national interest.”

The European Commission, the European Central Bank and the I.M.F. have been holding talks in Athens to finalize the terms of the aid package, which were expected to be completed next week.

But even with those talks moving ahead investors have been worrying about the country’s financing needs in coming months and years.

Greece needs to raises around €10 billion in May to cover redemptions, coupon payments and its primary government deficit, according to investors.

The yield on benchmark 10-year Greek government bonds fell to 8.1 percent Friday after the reports, having touched fresh record Thursday close to 9 percent. The euro rose against the dollar after briefly touching the lowest point in a year early in the day.

The Athens composite share index gained almost 4 percent around midday, with shares in Greek banks surging after their recent sharp declines.

In his address, Mr. Papandreou did not confirm on widespread speculation in Athens that the release of the loans for Greece would be dependent on additional austerity measures. The two previous packages have already amounted to about 6 percent of gross domestic product.

Describing Greece's dire economic situation as “a sinking ship” his Socialist administration inherited from the outgoing conservatives last October, Mr. Papandreou said the rescue mechanism would “allow us to rebuild our ship with strong and resilient materials.”

On Thursday the European Union revised higher its estimate of the country’s 2009 budget deficit — meaning that austerity measures being negotiated with the I.M.F. and euro-zone countries might have to bite deeper.

Eurostat, the European Union’s statistics agency based in Luxembourg, raised its estimate of the country’s budget deficit for 2009 to 13.6 percent of gross domestic product, from the recent Greek government prediction of 12.9 percent.

The Greek Finance Ministry said in a statement that the announcement by Eurostat did not alter its goal of reducing the deficit by at least four percentage points of G.D.P. in 2010, as laid down in the Greek stability and growth program, which it forwarded to the European Commission for scrutiny.

Meanwhile, Moody's Investors Service, the ratings agency, downgraded the government bond ratings of Greece to A3 from A2 and placed them on review for further possible downgrade in view of the “significant risk that debt may only stabilize at a higher and more costly level than previously estimated.”

Even with the decline in yields Friday, investors expect a higher return for holding Greek 10-year debt than equivalent bonds issued by the Philippines and India.

Matthew Saltmarsh reported from Paris.