EU to weigh two options for Greece debt bailout

Debt-hit Greece heads for another grilling by European peers in Brussels this week over its austerity programme in the wake of a general strike and amid deteriorating recession and jobless figures.

Greek Finance Minister George Papaconstantinou has to show his European Union (EU) counterparts in two days of meetings that Athens can enforce draconian cuts whilst fighting a recession and facing angry protests on the streets.

Detailed options for European-level financial support to help Greece out of its debt crisis will also be presented to eurozone finance ministers when they meet today and tomorrow, European sources said.

Reports suggest that two main proposals will be placed on the table.

One involves a series of loans by European partner countries, co-ordinated by the European Commission, the EU's executive arm, while the other would see the Commission borrow money on markets and extend Greece loans guaranteed by EU states.

An internal Commission document quoted by French daily Le Monde said the first option is seen as easier in the short term, but the second is favoured in the long-run. But the latter approach would require the assent of sceptics in Britain and Sweden because the Commission acts for all 27 EU member states, and not just the 16 that share the euro.

Papaconstantinou's briefing comes under Greece's duties to regularly report its finances after the EU imposed "quasi-permanent" supervision last month in reaction to Athens revealing that it had grossly under-reported its budget figures.

The Socialist government in early March unveiled a wave of state spending cuts and tax hikes worth €4.8 billion (Dh26.79bn) and hopes to save a total of around €15bn this year, according to finance ministry sources.

More cuts are on the way. A new law overhauling the tax system is expected by the end of March and legislation to reform pensions and increase the statutory retirement age will come the following month.

But in a report released ahead of the EU finance ministers' meetings, Greece admitted recession could force it to take further deficit-cutting steps.

Part of the uncertainty stems from social reaction to the cuts and tax hikes, with joblessness at 10.2 per cent, which have sparked two general strikes and street clashes between demonstrators and riot police in the last two weeks.

Official data on Friday showed the Greek economy shrinking by 2.5 per cent in the last three months of 2009 compared to output in the fourth quarter of 2008, a slight improvement on a previous estimate.

But the Greek finance ministry report said national output in 2010 "will most likely be lower" than its January forecast of a 0.3 per cent contraction.

It added that "very high yields" on government bonds will probably lead to a revision in budgeted debt payments in 2010.

And it acknowledged EU concerns regarding the effectiveness of a new tax evasion crackdown.

Greece needs more than €20bn by May to avoid defaulting on old debts.

The government is desperate to improve its downgraded credit rating and reduce the crippling interest rate, currently slightly above six per cent, at which it has to borrow on international financial markets.

A total of €54bn will have to be raised this year to cover the public deficit which has swollen to 13 per cent of gross domestic product (GDP) – way beyond the three-per cent EU limit.

The Greek financial crisis has sapped the euro's strength and sparked talk among EU members about the possible need for a European support mechanism akin to the International Monetary Fund.

But European Central Bank Chairman Jean-Claude Trichet on Wednesday said the Greek economic measures adopted so far were "convincing".

The European Union and outside observers have noted that the Greek government has set itself ambitious targets after decades of mismanagement, but broadly agree that question marks remain over the implementation of these targets. "I think the final evaluation will be over the first four months of the year," said Yiannis Stournaras, General-Director of the Foundation for Economic and Industrial Research, a private think-tank.

In its report to Brussels this week, the finance ministry said it expects shipping receipts to rise by around 10 per cent due to a recovery in world trade and transportation. It also anticipates another three per cent to four per cent increase in tourism arrivals.

Shipping and tourism are the main contributors to the Greek economy.

 

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