A man walks in front of the Academy of Athens with a statue of ancient philosopher Socrates in the foreground 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.
His plea to resort to the fund is admission that Greece can no longer afford to raise debt on its own, and faces possible default as Greek bond yields soar. It came one day after Eurostat, the EU's statistical branch, revealed that Greece's 2009 budget deficit was 13.6 per cent of gross domestic product (GDP), up from the previous estimate of 12.9 per cent.
Mr. Papandreou had hoped that the mere promise of support from the EU and IMF would be enough to restore confidence in Greek debt. Bond investors clearly thought the safety net alone was not enough - the loans themselves would have to flow.
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Economists said the loans will not arrive immediately. Negotiations with the IMF will take another two weeks or so. Meanwhile, some of the EU countries will require parliamentary approvals to fund the EU portion of the rescue package. Some of the debt-swamped countries - Spain, Portugal and Ireland, among them - may resist the approvals because their own treasuries are bare.
Ideally, Greece would want the package in place by May 19, when it has to redeem some debt.
Thursday's news of the wider deficit pushed down Greek bond prices, raising the yield on the 10-year notes to about 9 per cent, or about three times the comparable level of German debt.
The emergency loan package is expected to be two-thirds funded by the EU, and one-third by the IMF. What conditions the IMF will impose are not known, but Greek citizens fear the austerity measures demanded by the IMF will exceed those already announced by the Greek government. Greece was hit by strikes and protests on Thursday as voters feared their pension plans and incomes face considerable damage.
Also unknown is the likelihood of a full-blown debt restructuring, in which debt holders would be forced to take a "haircut" on investments.
In London, UniCredit economist Marco Annunziata said talk of a restructuring on top of a rescue package can be "extremely troubling, as there can be an element of self-fulfilling prophecy in this case, as fear of a restructuring inevitably keeps yields a elevated levels."
The euro rose slightly in the morning as the first media reports of the bailout surfaced. The spread between German and Greek 10-year bonds narrowed by about 50 basis points (100 basis points equals 1 percentage point). After Mr. Papandreou's announcement, the yield on 2-year debt, which had climbed above 10 per cent Thursday, fell by about 80 basis points to 9.48 per cent.
Greece's total funding requirements this year, including interest payments and rolling over existing debt, are €53-billion. In 2011 and 2012, it must raise almost €100-billion. The figures could go higher because Eurostat, noting the "uncertainties" about Greece's economic data, might have to revise the deficit figure to as high as 14.1 per cent. The only EU country with a higher deficit is Ireland, whose deficit is 14.3 per cent.