EURO: Greek rescue plan crumbles

Markets spooked as Greek rescue plan crumbles

Europe’s rescue plan for Greece appears to be crumbling after the country threatened to call in the International Monetary Fund unless Brussels comes up with real money on acceptable terms within a week.

By Ambrose Evans-Pritchard
Telegraph, 19 Mar 2010

The inability of the eurozone to put together a viable package after a month of talks has dismayed markets, which thought the terms of a deal had already been agreed. Yields on 10-year Greek bonds spiked 17 basis points yesterday to 6.26pc. The euro fell two cents against the dollar to below $1.36. "The facade of unity among eurozone members hardly held for more than a day," said Beat Siegenthaler from UBS.

Greek Premier George Papandreou told the European Parliament that his country was running out of patience. It is in effect already subject to the full rigours of an IMF-style austerity plan but without enjoying any of the benefits. He said the savings from cost-cutting measures were vanishing into the pockets of bond-holders through higher interest rates.

"We have the worst of the IMF and none of the advantages. This is where Europe must come in and provide what the IMF can offer. Or Greece will have to go to the IMF. We hope that will not be necessary," he said.

"I prefer a European solution as part of the eurozone, to show the world that Europe can act together. This is not to ask for money but to have an instrument on the table to stop the speculation. We expect the EU to live up to the challenge facing it. We are a eurozone country," he said. Hungary was better off with a "free currency", able to work with the IMF outside the eurozone.

"Papandreou is playing poker," said Silvio Peruzzi from RBS. The defiant tone leaves no doubt that this escalating game of brinkmanship has turned deadly serious. If Mr Papandreou is bluffing, his bluff is likely to be called since a German-led bloc of states is also warming to the IMF as the best way after all to maintain EMU discipline.

Such a course enables Chancellor Angela Merkel to avoid a legal battle at Germany’s top court over breach of the EU’s `no-bail-out’ clause; it avoids a deeply unpopular decision before the regional elections in May; and it leaves the Fund’s experienced fiscal police in charge of austerity.

Mr Siegenthaler said the Greek story "is far from resolved and will continue to haunt the Euro." Vague rhetoric from EU finance ministers is no longer enough to satisfy markets.

"Greece is trying to deliver fiscal adjustment of a magnitude unprecedented in post-war Europe. Naturally, this will create serious social and political tensions. In the absence of economic growth, Greece will need access to cheap financing if it is to escape a debt spiral," he said.

Sources in Washington say Greece can expect to borrow from the IMF at around 3.25pc. While the EU has not specified its own terms, the Eurogroup said this week that any help would come at a punitive rate above the borrowing costs for other EU states, suggesting a rate of 4pc to 5pc.

Mr Peruzzi said the IMF route is fraught with danger, even if it looks tempting in the short-run. "It completely undermines the credibility of monetary union. It would show that EMU is not viable because it lacks the fiscal means to absorb shocks. If they can’t help out a small country like Greece, its not worth going on with the project. That is what is worrying the markets," he said.

He said Italy and several other states are quietly willing to go along with an IMF solution because it spares them the extra burden of raising fresh debt to help pay for a standby fund. "They don’t want to disburse any cash of their own. This is definitely on their minds," he said.

Germany appears to have deeper objections to an EU bail-out, fearing that it would be the first step towards EU fiscal union and shared responsibility for debts, leaving German tax payers on the hook for over €3 trillion in Club Med debts. The concerns appear to be shared by Finland and the Netherlands, which have both backed recourse to the IMF.

Mr Papandreou said his country did not want charity. "We are not asking for money from the Germans, Italians or French, what we are saying is that we need strong political support for reforms and to make sure that we do not have to pay more than necessary. We need to borrow at rates that are normal, similar to the rates other states in the EU and eurozone can use," he said.

Mr Papandreou said speculators were the cause of his country’s woes and demanded that Europe "put the loaded gun on the table" to deter attacks by hedge funds. This argument is starting to irritate Berlin, where it is seen as a ploy to absolve Greece for responsibility for its own troubles, and to circumvent legal restrictions on EU aid.

Mrs Merkel told the German Bundestag on Wednesday that Greece’s trouble were home-grown and had almost nothing to do with speculators. Hammering home the point, she said the EU Treaties should be changed to allow the expulsion of countries eurozone "as a last resort" if they persistently breach the rules.

The comment caused consternation in EU capitals, suggesting for the first time that Germany no longer views EMU as an unbreakable and eternal fraternity. "Chancellor Merkel’s comments are very worrying," said Guy Verhofstadt, former Belgian premier and now head of Europe’s Liberals.

"This is a very bad signal," said Udo Bullmann, chief finance spokesman for Germany’s Social Democrats. "This plays straight into the hands of the enemies of the European Project."

However, Mr Papandreou is in danger of exhausting sympathy in other EU states. His game of playing off the EU and IMF against each other has begun to irk fellow leaders, and his insistent claim that Greece is the victim of speculators may be unwise in any case. It creates the impression that the country has been cut off from access to the capital markets. By demonizing credit default swaps his rhetoric may discourage investors from buying Greek bonds, since many use these contracts to hedge their holdings. Deutsche Bank chief Josef Ackermann said the furore over CDS swaps showed a "basic misunderstanding" of modern [fraudulent] finance.

Ireland has overcome its confidence crisis by resisting the temptation of shoot the market messenger and by projecting an image of worldly sophistication. Analysts say Greece would do well to learn the lesson.