Plan may not get Greece out of woods

Bond markets are still flashing warning lights that someday Greece might say it can't pay. Photo / Mark Mitchell

ATHENS - Help is on the way for debt-stricken Greece, but fears of an eventual financial disaster still haunt the country and the rest of the 16-nation eurozone.

A US$45 billion ($62.4 billion) bailout package from other eurozone countries and the International Monetary Fund should see Greece through its borrowing needs for this year. But the bailout is complicated by German grumbling about the burden of the bailout on its own finances.

Bond markets are still flashing warning lights that someday Greece might say it can't pay - and announce a restructuring or default.

That kind of collapse wouldn't be unprecedented - occurring in both Argentina and Russia in 2001 and 1998 - but could spread the debt crisis to other troubled eurozone countries such as Portugal, Spain and Ireland.

That could make lenders even more reluctant, bringing higher borrowing costs for governments that would crimp what they can do across Europe for years to come.

A key indicator - the interest rate gap, or spread, between Greek and benchmark German 10-year bonds trading on financial markets - jumped to a record 6.5 percentage points yesterday, the first day of trading after Athens asked for the eurozone-IMF rescue to be activated last week.

The gap translates into an interest rate approaching 10 per cent if the government were to try to raise money on the markets - three times what economic powerhouse Germany pays. Squirming between a massive budget deficit and a US$300 billion public debt, the spiralling borrowing costs forced Athens to request the rescue package.

Finance Minister George Papaconstantinou said he expected the IMF board would approve its portion of the loan support - about a quarter - in the first 10 days of May.

If some European parliaments were delayed in approving their contributions, the IMF support could be used to obtain bridge financing from other sources.

The Government is already implementing an austerity program that cuts civil servants' wages, increases taxes and freezes pensions. While the reforms have triggered strikes and protests, they have been relatively muted so far by Greek standards, although that situation could change if deeper cuts are introduced.

The question is, can Greece cut enough to restore investor confidence?

Jeremy Batstone-Carr of Charles Stanley stockbrockers in London, thinks restructuring is inevitable and better than default. "Greece is hoping to bridge its financing gap for little more than a year," he said.

"Unless a solution emerges to address the financial markets' obvious uncertainty regarding the crisis, the Greek government will be back, cap in hand, begging for further financing."

The bailout "solves nothing - either existing debt is restructured or Greece defaults, it really is as simple as that."

But Michael Massourakis, chief economist at Alpha Bank in Athens, says Greece can cut more fat to restore its finances.

"There is a lot of structural reform, privatisation, deregulation still in the pipeline, and all these things can turn around the situation dramatically," he said.

"So I don't think Greece is in a situation where debt restructuring is an issue."

Market jitters have been fuelled by Germany, the largest contributor to the eurozone-IMF rescue package with US$8.37 billion, which has been reluctant to bail out a country that has spent beyond its means for years.

- AP