Greek premier George Papandreou is shortly expected to seek formal activation of a 40bn Euro EU/IMF rescue package, after a week in which the pressure on the nation’s tattered finances has become intolerable.
The implementation of the rescue deal – some 30bn Euros from the EU and a further 10-15bn Euros from the IMF – has been precipitated by yet another debt downgrade this morning, plus the news from Eurostat that Greece’s 2009 deficit is even worse than had been thought, revised up to 13.6% GDP from the previous estimate of 12.7%.
Combined with the skyrocketing yield on Greek debt in the bond markets – at its highest level since 1998 – it has become abundantly clear that there is only one way out of the economic mire for Greece, and that is bail-out.
Some commentators are even suggesting that investors may have acted to end the damaging uncertainty by forcing the issue. Hence yesterday’s mass sell-off of Greek bonds, pushing yields on what is supposed to be just about the lowest risk investment around – government debt – to getting on for 10%. If anyone knows of a building society account which offers anywhere near to that much interest, we’d love to hear from you.
We can’t blame investors for getting impatient - watching the big EU member states (that's France and Germany in effect) and the IMF scrap over who will contribute how much to the rescue deal certainly hasn’t been an edifying prospect. Especially considering that the majority of Greek government debt is held by French and German banks, so if their government's didn't cough up for a rescue then their banks would end up paying anyway as Greece would be forced to default on its debts.
Not that the Greeks themselves are blameless of course. Far from it. They have been spending too much for too long. Indeed, by its own ‘austerity’ estimates Greece needs to spend all the money on offer from the rescue deal this year, and will no doubt want more next year and the year after that. Money which it is by no means clear that anyone will want to lend them.
The squaring of that particular circle will probably be achieved by a package of even more stringent spending cuts imposed on Greece from above – not a position any sovereign government wants to find itself in, and hardly conducive to civil harmony.
The markets reacted with cautious optimism to the news, with European stocks rising slightly and the Euro coming off its lowest point for a year. But although the immediate crisis may be over, without further bail out funds there is still a very real chance that Greece will have to restructure its debt (ie write a big chunk of it off) at some point in the future.
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