A protester shouts slogans during a rally against the government's decision to ask for an economic aid package in Athens April 23, 2010.YIORGOS KARAHALIS
Greek prime minister George Papandreou Friday requested the activation of a €40-billion-plus bailout package as the country's financial health spirals downward.
Speaking from an Aegean island before he heads to Washington for International Monetary Fund meetings, Mr. Papandreou said there is an "extreme necessity" for the package, which is to be delivered by the European Union countries and the IMF. (Read more from Eric Reguly's story:
Reporter Eric Reguly, who has been following the Greek crisis, offered his take from his home in Rome. (*** Download and listen to the full interview at the bottom of this page.)
What happened Friday morning? Was anyone expecting Greece to ask for an emergency bailout?
Absolutely. After Thursday's events, it would have been shocking if the Prime Minister did not ask for its bailout. What happened yesterday was just a virtual meltdown. Greece's deficit was revised upward again for the third time this year. The budget deficit from last year is now north of 13 per cent, so it keeps going up and up. That created another crisis of confidence.
What happened right after that is Greek bonds started selling off, and the yield went in the opposite direction. On 10 year notes it went up to around 9 per cent, and that's dangerously high. When you get into 10-11 per cent yields, that tells you that this paper is very, very risky, that there's a high risk of default.
And the final blow in a terrible day for Greece was that its debt got downgraded again. The combination of all that resulted in a real crisis that told the world that Greece could not fund itself on its own accord and it needed a bailout, and that's what happened. The Greek Prime Minister pleaded for one and it will come some time in the next two or three weeks because Greece has to redeem some debt and needs the loans in place by then.
It seems like we've be hearing about these problems for a couple of months now. How did we get here?
Greece has secretly been a mess for many, many years. It's been living beyond its means, but it didn't tell anyone about it. It fudged the figures and some people think it purposely lied. The deficit was always bigger than was reported and we know that's true right now when Mr. Papandreou's government was elected last October, the first thing they did was look at the books and they realized the debts had been dramatically understated at about 6 per cent, officially. The government put out a new figure at around 12 per cent. And now that's north of 13 per cent. That's the root of the problem, that they were spending far more than they were admitting to.
The other problem is the economic crunch didn't help, but that wasn't the main reason. It just went on from there and Greece was very, very slow to implement austerity measures. They're at least partly in place now, but the base of the market just totally lost confidence in Greek debt and that reflected in the price of the euro -- it's lost 7 or 8 per cent this year alone, and it's very low compared to the U.S. dollar.
Why did the EU and the IMF agree to the bailout? Was this necessary?
It was absolutely necessary. They agreed to the bailout for several reasons. The European Union does not want to see confidence evaporate in their currency. It's dominated by France, Germany and Italy, and those three countries are huge supporters of the currency and common market. They want this economic experiment to work for the long-term, and when you have a country which threatens to destroy the beauty of this whole union as they see it, they had to intervene.
But there's another compelling reason too, and that's that European banks, especially French and German banks, own tens of billions of euros in Greek debt. They hold this in their books and if this Greek debt were allowed to default, these banks in northern Europe would get slaughtered, and they're already weak from the recession and credit crunch. Some of these banks have already been bailed out, and if you add on a Greek default on top of that, it would be really, really bad news, and it could mean that these banks have to be bailed out a second time, so that's another reason for it.
The package still has to be approved by various EU countries. It sounds like it's in their best interests to go ahead and pass it?
I think they will because they're all in this together. The EU is billed as a big family and the idea is you help each other out. Now the problem is that some of these countries that will have to contribute to this bailout package are in trouble themselves. Ireland's deficit is even bigger than Greece's, though its overall debt-load is lower. Portugal and Spain are in bad shape. Spain has a very high deficit and 20 per cent unemployment. These countries can ill afford to help, but they're going to have to, because if they don't contribute, what's going to happen in this next crisis? The EU may say, you didn't help Greece, so we're not going to help you. So begrudgingly, they are all going to have to chip in.
What conditions might the IMF impose on Greece?
The Greek government has already imposed fairly rigorous austerity measures on spending. That means wage freezes, and raising the average retirement age to age 67 (right now it's in the late fifties, one of the lowest in Europe).
There were protests on Thursday and strikes, and there were a lot of them over the last few weeks -- it paralyzed big Greek cities.
The IMF is notorious for demanding blood for its money. So the IMF is going to come in and demand even stronger austerity measures. They could even demand that Greece's civil servants be fired, not all of them of course (there's about a million of them, it's a very bloated bureaucracy), but it could demand layoffs or outright firings. This is a huge problem for the Greek government because when they're elected in October, they promised there would be no cutbacks and that the civil servants would be left in tact. That obviously is not the case any more, so when the IMF comes in, there's going to be more pushback from Greek citizens and voters. And in this next election, this government could get voted out.
Another unknown is the likelihood of a full-blown debt restructuring, in which investors could take a haircut. What are the chances of this happening?
They're pretty high. if you look at this bailout package, it buys them time, but it doesn't really change much. It prevents a default this year, but the truth is, Greece is still running huge deficits, they're going to come down, but fairly slowly. Its debt is ballooning and could go to 150 per cent of GDP fairly quickly and the killer is since there's no economic growth, and if you have growth, the economy fixes its problems for you, but there is no economic growth, there's a recession in Greece, so it can't count on growth to save itself, so the alternative is a debt restructuring.
That means that whoever owns Greek debt will be asked to for example take a lower interest rate on the bond or would be asked to extend the maturity date on the bond, in other words, pay them out more slowly, or an outright haircut, where they'd reduce the principal. Instead of being paid back 100 cents on the dollar, they might be told you're only getting 80 or 90 cents on the dollar. It's going to be ugly. But this is not going to happen right away, it might take another year or two.
What's next? Will markets stay calm?
For this year, the bailout removes the immediate threat of a default and allows Greece to fund its deficit this year and pay its interest rate. But now the hard work begins. They have to implement these austerity measures and get confidence back in Greek bonds, and the Greek government has to tell its citizens that the party is over and next year's going to be very, very tough for everyone and it has to work. Because if it doesn't work, there's going to be a run on the euro.
The EU and the IMF also need a template with Greece. They need a system that works because there could be other problems, in Spain, Portugal and possibly even Ireland. And if it gets the package right, then they could clone it for other countries that get into trouble and having that system in place shows the world that the EU knows what it's doing and knows how to restore confidence and fix its member states, and that would restore confidence in the euro.