EU Bets $146 Billion on Greek Bailout to Avert Contagion

Euro-region governments are betting 110 billion euros ($146 billion) in economic medicine for Greece will be enough to inoculate the rest of their region from contagion., Bloomebrg 5/3/2010 10:51:27 AM

Finance ministers approved the unprecedented bailout yesterday for Greece after a week that saw the country’s fiscal crisis spread to Portugal and Spain. At the same time, they refused to say how they would help other indebted nations if the need arose, calling Greece a special case.”

The risk is that investors will shift focus to other euro nations in the absence of a clear aid plan for the 16-nation bloc’s weakest members. The extra yield investors demand to buy Portuguese debt over German bunds surged to the highest since at least 1997 and Spain’s IBEX 35 stock index fell the most in three months last week. The euro fell against the dollar today.

Greece yesterday pledged to push through 30 billion euros ($40 billion) of budget cuts, equivalent to 13 percent of gross domestic product, in return for loans at a rate of around 5 percent for three years.

The EU and the International Monetary Fund, which is co- financing the bailout, also agreed to set up a bank stabilization fund. With downgrades threatening to render Greek bonds ineligible for collateral for its loans, the European Central Bank today said it will accept all Greek government debt when lending to banks.

European officials rushed to draw a distinction between Greece, whose misstated budget figures first roiled markets last year, and other countries.

Spain’s budget deficit was the third-highest in the euro region last year, at 11.2 percent of GDP. Portugal’s budget deficit was the fourth-biggest at 9.4 percent of output. Ireland had the highest deficit at 14.3 percent and Greece’s was 13.6 percent.

At stake is the future of the euro 11 years after fiscal policy was left in national capitals. The euro has fallen 7 percent this year as the lack of a single finance ministry made it harder for governments to agree on whether and how to rescue Greece. That in turn exacerbated a selloff in Greek bonds.

Governments first agreed to support Greece on Feb. 11 and didn’t make any concrete pledge of cash until two months later.