Greece Asks EU to Trigger Bailout Agreement

Greece called for activation of a financial lifeline of as much as 45 billion euros ($60 billion) this year in an unprecedented test of the euro’s stability and European political cohesion., Bloomberg 4/23/2010 12:04:18 PM

The appeal for help from the European Union and International Monetary Fund follows a surge in borrowing costs to what Greek Prime Minister George Papandreou called unsustainable levels that undermine efforts to cut a budget deficit that is more than four times the EU limit.

With national debt of almost 300 billion euros and investors demanding almost triple what they charge Germany for its 10-year bonds, Greece faces a fiscal mess that threatened to spread to Spain and Portugal, forcing the EU to set up a standby aid facility. At stake is the future of the euro 11 years after its creators gave the European Central Bank responsibility for interest rates while leaving budget policy in national capitals.

The request came a day after the yield on the country’s benchmark two-year note topped 11 percent, approaching that of Pakistan, and Moody’s Investors Service lowered Greece’s creditworthiness by one notch to A3, saying it was considering further cuts. Greek securities initially rallied on the announcement and then pared the gains.

The yield on the Greek 2-year bond rose 4 basis points to 10.672 percent, the highest since before the start of the euro in 1999 and more than 10 times the German rate. The yield had declined more than 200 basis points today.

Greece’s ASE stock index also reversed a gain of as much as 4.6 percent and declined 0.2 percent to 1857.96. The benchmark has shed more than a third of its value in the past six months as banks, the biggest holders of Greek bonds, slumped and concerns the crisis will lead to a prolonged recession hurt the market.

The Greek request needs approval from all 15 other euro- area countries including Germany, where surveys have shown public opposition to aiding Greece. BlackRock Inc., the world’s largest money manager, has expressed concerns about a backlash” from citizens in EU nations prepared to offer a lifeline.

Luxembourg’s parliament today approved its part of the loans. France has already earmarked the funds, which still needs legislative approval. Germany, which will put up 8.4 billion euros of the loans, is ready to act” on parliamentary approval, Finance Ministry spokesman Michael Offer said today.

The three-year aid facility for Greece offers as much as 30 billion euros in loans from euro-area nations this year at a below-market interest rate of about 5 percent. As much as 15 billion euros are available in the first year from the IMF at even lower rates, EU officials have said.

The Greek government started talks on April 21 in Athens with EU and IMF officials to set conditions on the funds before they are disbursed. Such deliberations, which usually take two to three weeks, may be completed in a matter of days,” said EU spokesman Amadeu Altafaj.

Facing 8.5 billion euros of bonds maturing May 19 and with little chance of being able to tap the financial markets, Greece won a promise by the IMF chief to act speedily over the call for a financial lifeline.

Under EU rules, governments must keep their budget deficits below 3 percent of gross domestic product. While the EU can penalize countries for breaching the limit, no nation has been sanctioned since the euro was introduced in 1999. Of the 16 euro region members, only Luxembourg and Finland had deficits within the limit last year.

The government’s deficit-cutting goal became questionable yesterday after Eurostat, the EU’s statistics agency, revised up the 2009 shortfall to 13.6 percent of GDP, and said it was considering a further revision to as much as 14.1 percent.

The government in Athens had pledged to reduce the budget deficit by at least 4 percentage points of GDP this year to 8.7 percent. When Greece first made that pledge, its starting point was a 2009 deficit of 12.7 percent.

Unions have already put the government on notice that there will be m...