GREEK CRISIS:EU AUTHORITIES are engaged in frantic efforts to develop a highly-conditional rescue package to help the Greek government to finance its deficit, writes ARTHUR BEESLEYEuropean Correspondent
After an apparent change of heart by German chancellor Angela Merkel, who opposed any bailout, the manoeuvres bring the single currency system into unchartered territory.
Weeks of pressure on Greece over its wayward deficit and shaky statistics are now set to take the European authorities a decisive step closer to something they were desperate to avoid: an extraordinary intervention to prop up the finances of a euro zone government.
In the backdrop lie growing fears of a contagion impact on Spain, debt-dependent like Greece but a much bigger player in European terms.
In addition, German banks are known to be big holders of Spanish sovereign debt. Neither is Spain alone. Portugal has also come under pressure.
It seems clear that the possibility of Germany leading a initiative with major countries such as France to offer loan guarantees to Greece is under consideration.
Bilateral loans from Germany and France are a further possibility. Also in the frame is the creation of a standby credit line from the 16-member euro zone group or from the wider EU.
While any of these options would be but a last-ditch measure to avoid Greece sinking into the abyss, the game plan at present is to force the government of George Papandreou to help itself by pursuing in full the severe austerity course already set out for the country.
Indeed, there were indications last night that Greece will be asked to come up with a more detailed package of measures. That said, moves to prepare emergency aid to the country as a last resort represent a tacit admission that the implicit guarantee of support that all euro members enjoy is not enough to face down speculative attacks in the financial markets.
Moves towards external help for Athens began days ago in Berlin with contact between German finance minister Wolfgang Schäuble and European Central Bank chief Jean-Claude Trichet.
Following the ECB’s monthly meeting in Frankfurt last Thursday, Trichet had travelled at the weekend to the G7 summit in Iqaluit, Canada, and onwards to Australia for a meeting of international central bankers.
The first sign that a big development was brewing came on Tuesday when it emerged that Trichet had cut short his stay in Sydney to return to Brussels.
By that stage the Luxembourgish prime minister Jean Claude Juncker – who is president of the euro group of finance ministers – was already putting preparations in place for an emergency conclave of ministers via video-conference yesterday afternoon. Ahead of that engagement, Schaeuble briefed German parliamentarians on the discussion as they would have to approve the measures.
These talks came in advance of a special summit in Brussels today at which EU leaders will discuss plans to recalibrate the union’s ailing economy. Questions about Europe’s response to the Greek crisis are inevitable. In the current hothouse atmosphere, to say nothing of substance would be to invite trouble.
Thus EU leaders appear likely to make an unambiguous expression of support for Athens, up to and including the option of financial assistance should that become necessary. It is likely to be made clear that any external aid would come at a price, and Greece would be urged to continue its efforts to put its own house in order.
A public statement along these lines would be designed to break what officials call the “vicious circle” of speculative attacks on the euro; essentially financiers placing big bets that Athens will ultimately fail to borrow the €50 billion to refinance debt this year and keep the Greek state afloat. As such, it would stand as an effort to avert a full-blown sovereign debt crisis taking hold in the euro zone.
If it came to it, however, any European intervention would raise searching questions about economic sovereignty in the EU.
To avoid copycat claims from other ailing euro members, special help for Greece would have to come at a very steep price, with exceptionally tough conditions imposed on the country’s leaders.
For such measures to effectively dilute fears of Europe capitulating to moral hazard, the domestic authorities would have to be seen to answering to outsiders. For the Greek people this risks adding humiliation to pain as political authority shifts from their capital.
This may smack as an alarming spectre, but it flows from anxiety about the contagion impact of the default-risk in Greece spreading.
So what brought us to this place? Athens has been punished and punished again by speculators, every small piece of bad news being seized upon as a portent of catastrophe. But in Brussels and other European capitals it had long been said in private that Greece would not be abandoned come the evil day.
As Greek bond spreads continued to widen – weakening the euro – it became increasingly clear in recent days that this implicit guarantee would not be enough. The European Commission threatened last week to impose budget measures on Athens if its latest austerity plan misfires. This warning weren’t enough to quench the flames.
Although Ireland’s fiscal problems are far from resolved, a series of tough budget measures have dissipated some of the immediate pressure on the Government. That said, it remains to be seen whether the Greek crisis can be resolved without further disruption in Dublin. Any Greek rescue will have consequences for all countries in the euro zone.
