EU explores loan to Greece

Officials want to avoid IMF involvement and Maastricht treaty clause might be side-stepped.

European Union officials are exploring the possibility of providing a heavily-conditioned loan to Greece instead of seeing it turn to the International Monetary Fund.

Officials are worried about the possible impact on banks elsewhere in the eurozone of Greece defaulting on its sovereign debt. But they would prefer to avoid the ignominy of a eurozone country seeking IMF assistance.

In recent days, the value of the euro has fallen sharply against the dollar, the pound and the yen, which is being attributed to fears that the economic crisis in Greece might damage the eurozone’s economic recovery.

“The fate of one is the fate of all,” said Joaquín Almunia, the European commissioner for economic and monetary affairs, after a meeting of EU finance ministers on Tuesday (19 January).

The EU does have a European Commission-administered programme for €50 billion of emergency assistance to member states with balance of payments problems, which has been used in the past year to help Hungary, Latvia and Romania. But the programme is designed specifically for non-eurozone countries and has been deployed alongside support from the IMF. Avoiding IMF involvement in a eurozone sovereign-debt crisis would be one of the objectives of creating a new lending facility.

Emergency guarantees

Another option under discussion would be to mobilise short-term emergency inter-governmental guarantees to Greece by some eurozone countries if conditions deteriorate rapidly.

Greece is regarded as particularly vulnerable to a sudden loss of confidence by financial markets which could lead to an international “lenders’ strike”.

Rating agencies have already cut their ratings on Greek debt. Indicative of eroding international confidence, yields on Greek government ten-year bonds have soared in recent weeks to 6.09% compared with 3.24% for German bonds.

Fact File

The European Commission is preparing proposals as to how Greece should repair its battered public finances: they will be put to the EU’s finance ministers next month.
The proposals will be published before the next meeting of EU finance ministers on 15-16 February and may be finalised as early as next week.
The package will include:
õ A recommendation to finance ministers as to how long Greece should be given to bring its budget deficit to within 3% of gross domestic product (the ceiling set by the EU’s stability and growth pact). The Greek government’s current plans foresee this being achieved in 2012.
õ A draft multi-annual deficit reduction plan. Based largely on a plan agreed by the Greek government on 14 January, it includes a freeze on recruiting civil servants, tax reform, salary caps for senior civil servants, and a rationalisation of local government.
õ An action plan to reform the national statistics office and how government ministries calculate expenditure.
õ Joaquín Almunia, the European commissioner for economic and monetary affairs, wants ministers to agree that they will evaluate Greece’s compliance with the deficit-reduction plan and action plan on statistics at least three times a year. Finance ministers are expected to endorse the package at their meeting on 16 February.
Jim Brunsden

Greece’s budget deficit is forecast to hit 12.7% of gross domestic product (GDP) for 2009, far above the EU’s 3% ceiling. Government debt is forecast to be 113% of GDP, double the 60% limit, and confidence in Greek statistics is shattered.

Absurd idea

Jean-Claude Trichet, the president of the European Central Bank, last week described as “absurd” the idea that Greece might be forced out of the eurozone, but he heaped pressure on Greece by issuing a blunt warning to governments that are not following sustainable economic policies. “No government, no state, can expect any special treatment from us,” he said.

There is mounting concern in Frankfurt, Brussels and in other eurozone capitals that, if the crisis is handled badly, contagion might spread from Greece to create financing difficulties for some other member countries of the eurozone, notably Spain, Portugal, Ireland and even Italy.

The discussions are complicated by the Maastricht treaty’s “no bail-out” clause for eurozone members. The treaty prohibits the direct financing of public entities’ deficits by national central banks or the European Central Bank.

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But, according to an EU official, the “no bail-out” clause might be side-stepped if the crisis was dealt with inter-governmentally within the Eurogroup. The Eurogroup – the gathering of finance ministers of the eurozone – is now recognised as an official EU institution under the Lisbon treaty.

Others argue that a facility which made support heavily conditional on a country meeting specific economic policy requirements would not fall foul of the treaty.

Jean-Claude Juncker, the president of the Eurogroup, has already set his cap against IMF involvement.

Speaking after a meeting in Paris on 14 January with France’s President Nicolas Sarkozy, Juncker said: “We do not think that assistance from the IMF to Greece would be appropriate or welcome.” Dominique Strauss-Kahn, the managing director of the IMF, said: “[Greece] is a eurozone country and it is totally normal that the eurozone and the European Central Bank try to work out its problems alone.”

Eurozone leaders would like to demonstrate that the eurozone is able to deal with its own problems internally without IMF involvement, but adverse market reactions may yet leave Greece and the EU with no other option.