Greek Bailout Plan No Guarantee of Success
Policy + Politics

Greek Bailout Plan No Guarantee of Success

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COLOGNE, Germany — Greece saw a trickle of relief from its debt crisis Tuesday as it successfully raised $2 billion in the bond market without having to draw from the European Union’s financial bailout commitment. Although the government was forced to pay a relatively high interest rate of 4.55 percent for 26-week bills, analysts and the news media widely characterized the strong market demand for Greek bonds as a measure of investor relief after learning some of the details of the bailout plan over the weekend.

But despite the momentary euphoria, the near-bankrupt Greece and its European confederates are not out of the woods yet in coping with the economic crisis. For one thing, EU member nations are far from agreement on the specific terms of the standby aid agreement they unveiled over the weekend. That and a lack of political will make it far from a done deal.
What’s more, there is growing concern among European leaders and financial experts that the bailout plan announced Sunday night will prompt Spain, Portugal and other European countries with high debt to ask for the same or a similar deal. 
The bailout plan revealed by EU finance ministers offers as much $40 billion in aid to Athens at a 5 percent interest rate, well below the 7.5 percent rate that investors were demanding of Greece last week. Here are the terms of the agreement (see chart).

CountryFunds PledgedPercent
Germany$10 billion25%
France$8.15 billion20.3%
Italy$7.3 billion18.25%
Spain$5 billion12.5%
The International Monetary Fund could make emergency contributions if needed.

However, points of contention remain. The EU has yet to resolve if and when to make the money available to Greece. Germany wants to give Greece more time to raise money, while France has been pushing for swifter action.
German Chancellor Angela Merkel has been the most reluctant EU member to move forward with the plan because next month’s elections could swing the upper house of German Parliament to the opposition. Four out of five Germans oppose the rescue plan, according to polls. Yesterday in Berlin, officials warned that the bailout plan would be instituted only as a last resort, and that Germany would not be left holding the bag for EU member states like Spain, Portugal and Italy, all of which have debt troubles similar to those of Greece.

Merkel has insisted that German taxpayers should not have to pay the price for Greek mismanagement and overspending or set a precedent for future rescues of other weaker Mediterranean countries. Her adamant stand has generated resentment in the rest of Europe, which is accustomed to German sacrifice in reaching larger regional political and economic goals.

 "The fact that a fire extinguisher has been mounted on the wall does not mean that it will be used," Merkel spokesman Christoph Steegmans said of the rescue plan yesterday.

Greek’s debt crisis was a decade in the making. The Greek government, awash in corruption, spent lavishly on infrastructure improvements and social programs and benefits, while concealing its mounting debt levels from the European Union. According to EU regulations, the annual budget deficit of a country cannot be more than 3 percent of annual gross domestic product. In 2009, Greece’s annual deficit was 12.7 percent of GDP. Its total debt is 113 percent of GDP.
Since these figures were first revealed in early January, the European Union has been erratic in addressing the Greek debt crisis, which threatened to spread throughout the continent. At first, the EU said there would be no bailout. But each of the three times Greece has appeared to be on the verge of financial collapse, the EU made a public declaration that it would provide financial assistance to Greece if necessary. But the severity of the crisis is too deep to be offset by a vague commitment.

The EU made a second declaration late last month, joining with the International Monetary Fund to outline a more concrete rescue plan for Greece.
Charles Wyplosz, professor of International Economics at the Graduate Institute of International Studies in Geneva, said that while the EU assurances provide short-term relief, in reality an EU bailout is far from likely. “There is no explanation at all about … why the EU finance ministers believe this is not against the ‘no bailout’ clause of the Lisbon Treaty,” which governs the EU and prohibits one member state from providing direct financial assistance to another, Wyplosz told The Fiscal Times.
“European governments seem to believe it’s enough to announce something to calm down markets without lending,” he added. “They think they can have their cake and eat it too.”
“Everyone knows what needs to go into the solution,” said Erik Jones, professor of European studies at the Johns Hopkins Bologna Center. “The problem now is how to sell (the solution) to diverse national electorates.”

Raffaella Tenconi, chief economist at WOOD & Company in London, said she was confident that challenges to the bailout plan based on the Lisbon Treaty could be resolved. But she added that the onus is on the Greek government, which has spent irresponsibly in recent years, to control spending and make politically unpopular social benefit cuts that inspire confidence in outside investors.
“The Greek government has the incentive to deliver,” she said. “It is well within their powers. It’s a matter of Greece making the tough choices.”