Greece Asks EU to Trigger Bailout Agreement

Greece called for activation of a financial lifeline of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro’s stability and European political cohesion.

The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels that undermine efforts to cut a budget deficit that is more than four times the EU limit.

“There was no response from the markets, either because they didn’t believe in the political will of the EU or because they decided to go on with speculation,” Papandreou said today. “The situation threatens to demolish not only the sacrifices of the people but also the regular course of the economy.”

With national debt of almost 300 billion euros and investors demanding almost triple what they charge Germany for its 10-year bonds, Greece faces a fiscal mess that threatened to spread to Spain and Portugal, forcing the EU to set up a standby aid facility. At stake is the future of the euro 11 years after its creators gave the European Central Bank responsibility for interest rates while leaving budget policy in national capitals.

Rating Cut

The request came a day after the yield on the country’s benchmark two-year note topped 11 percent, approaching that of Pakistan, and Moody’s Investors Service lowered Greece’s creditworthiness by one notch to A3, saying it was considering further cuts. Greek securities initially rallied on the announcement and then pared the gains.

“Clearly, the package will buy Greece time this year,” said Colin Ellis, European economist at Daiwa Capital in London. “But that’s all that it has done. Greece still faces a herculean task to show that it can get its public finances in order and reduce its deficit.”

The yield on the Greek 2-year bond rose 4 basis points to 10.672 percent, the highest since before the start of the euro in 1999 and more than 10 times the German rate. The yield had declined more than 200 basis points today.

Greece’s ASE stock index also reversed a gain of as much as 4.6 percent and declined 0.2 percent to 1857.96. The benchmark has shed more than a third of its value in the past six months as banks, the biggest holders of Greek bonds, slumped and concerns the crisis will lead to a prolonged recession hurt the market.

One Roof

The euro, which has dropped 7 percent this year as Greece undermined confidence in the single currency, rose to $1,3363 today after slipping to a one-year low yesterday of $1.3261.

Economists including Harvard University Professor Martin Feldstein have said the single currency would falter because divergent economies couldn’t fit under one monetary roof.

The Greek request needs approval from all 15 other euro- area countries including Germany, where surveys have shown public opposition to aiding Greece. BlackRock Inc., the world’s largest money manager, has expressed concerns about a “backlash” from citizens in EU nations prepared to offer a lifeline.

“We want to see the EU countries really get behind it and see that they’ve gelled around the idea of providing this support at the government level, at the senior policy maker level,” Curtis Arledge, chief investment officer of fixed income at BlackRock, said on April 13. “If you see the backlash, they need to get their people on board.”

National Approval

Luxembourg’s parliament today approved its part of the loans. France has already earmarked the funds, which still needs legislative approval. Germany, which will put up 8.4 billion euros of the loans, is “ready to act” on parliamentary approval, Finance Ministry spokesman Michael Offer said today.

The three-year aid facility for Greece offers as much as 30 billion euros in loans from euro-area nations this year at a below-market interest rate of about 5 percent. As much as 15 billion euros are available in the first year from the IMF at even lower rates, EU officials have said.

The Greek government started talks on April 21 in Athens with EU and IMF officials to set conditions on the funds before they are disbursed. Such deliberations, which usually take two to three weeks, may be completed in “a matter of days,” said EU spokesman Amadeu Altafaj.

Looming Redemptions

Facing 8.5 billion euros of bonds maturing May 19 and with little chance of being able to tap the financial markets, Greece won a promise by the IMF chief to act speedily over the call for a financial lifeline.

“We are prepared to move expeditiously on this request,” IMF Managing Director Dominique Strauss-Kahn said today.

Greek Finance Minister George Papaconstantinou said the approval processes by the euro area and IMF “will all go in parallel and quickly.” He said that triggering the aid facility leaves “no doubt” about Greece’s ability to repay debt next month and that the country will tap markets again “when the conditions are appropriate.”

Under EU rules, governments must keep their budget deficits below 3 percent of gross domestic product. While the EU can penalize countries for breaching the limit, no nation has been sanctioned since the euro was introduced in 1999. Of the 16 euro region members, only Luxembourg and Finland had deficits within the limit last year.

The government’s deficit-cutting goal became questionable yesterday after Eurostat, the EU’s statistics agency, revised up the 2009 shortfall to 13.6 percent of GDP, and said it was considering a further revision to as much as 14.1 percent.

Deficit Pledges

The government in Athens had pledged to reduce the budget deficit by at least 4 percentage points of GDP this year to 8.7 percent. When Greece first made that pledge, its starting point was a 2009 deficit of 12.7 percent.

Unions have already put the government on notice that there will be more strikes if Papandreou seeks to impose more austerity measures beyond the tax increases and wage cuts already implemented under the 2010 deficit goals. Civil servants held their fourth one-day strike of the year this week and other unions have regularly walked off the job since the original measures were announced, threatening to deepen the recession.

Greece’s economy may contract 4 percent this year, twice as much as in 2009 and double the government’s forecast, according to Deutsche Bank AG. After a wave of domestic protests against austerity measures, the government needs to raise almost 10 billion euros by the end of May to cover maturing bonds and another 20 billion euros by the end of the year to pay debt coupons and finance the deficit.

Late Entry

Greece failed to qualify for the euro area initially, joining two years later and only after understating its budget gap. With the euro, ECB interest rates that never exceeded 4.75 percent and EU funds to help build roads and airports, the country had economic growth of about 4 percent on an annual average basis -- one of the fastest in Europe -- until 2008 when Lehman Brothers Holdings Inc.’s collapse sparked a global financial crisis.

German politicians have expressed reluctance to aid Greece, citing the country’s manipulation of statistics to qualify for euro entry and an EU treaty clause that prohibits bailouts.

Allies of Chancellor Angela Merkel, a Christian Democrat, criticized her for signing up to an April 11 European deal on the setting some of the terms of any aid for Greece, saying she dropped an initial demand that subsidies be ruled out.

‘Stringent Conditions’

“Germany buckled under the pressure -- we shouldn’t kid ourselves that such loans are anything but subsidies,” Frank Schaeffler, deputy finance spokesman for Merkel’s Free Democrat junior coalition partners, said at the time.

Merkel today said the Greek government, which aims to bring its deficit within the European limit in 2012, must satisfy “very stringent conditions” for aid and negotiate a “credible savings program” with the EU and IMF.

“Only when those two conditions are met can we talk about specific aid, including the kind of aid and the amount,” she said.

Papandreou had called the EU-IMF aid facility a “loaded gun” that would lower borrowing costs in the market and make an actual request for support unnecessary. Investors weren’t intimidated and the rout in Greek bonds intensified after the aid package was adopted on April 11. Greek 10-year bond yields have soared more than 125 basis points since then and topped 10 percent yesterday, the highest since 1998.

The yield premium that investors demand to hold Greek 10- year bonds instead of benchmark German debt widened to more than 500 basis points yesterday, the most since before the euro’s 1999 debut.