GERMANY and other European countries are working on a bailout plan to save debt-laden Greece and restore confidence in the single European currency, it emerged last night. The talks, which involve a range of possible options and could yet collapse, confirm that the European Union is keen to step in to stem mounting panic in the markets.
A bailout, which could be through a loan from EU states or involve a Brussels-backed bond issuance, would represent the first rescue of a Eurozone member in the currency’s 11-year history.
German chancellor Angela Merkel said that aid would come “under strict conditions and if the Greek government undertakes far-reaching state reforms.”
A senior German ruling coalition source said last night that the Eurozone countries had decided “in principle” to help Athens.
A German government spokesman clarified that no final decision had been made, but outgoing EU Monetary Affairs commissioner Joaquin Almunia backed a bailout plan.
“I would like the leaders of Europe to say to the Greek authorities that in exchange for the efforts you are making, you are going to get support from us,” he said.
Eurozone governments are not keen to involve the International Monetary Fund (IMF), viewing it as a setback to their autonomy. Economist Nouriel Roubini said it was a “step in the right direction,” that other European countries were considering helping Greece but said an IMF loan would be better in the long run.
He said: “IMF lending is based on conditionality of achieving certain fiscal and structural goals. In the case of loan guarantees, it’s very hard to make those loan guarantees conditional...you either give them – or don’t give them.”
Robert Quinn, European strategist at Standard & Poor’s equity research, said he was sure Greece would eventually be bailed out.
“Is it the EU? Is it the IMF? It doesn’t matter. They are not going to default,” he said.
Greece also announced new steps to reduce its deficit yesterday, including a public sector wage freeze and tax system overhaul.
The euro climbed against the dollar yesterday, reaching a high of $1.38, as it became clear that governments were in talks about an emergency rescue package, ahead of tomorrow’s meeting of European leaders to tackle the crisis. European Central Bank president Jean-Claude Trichet will attend the special EU summit to discuss how to resolve Greece’s financial crisis.
The Greek government’s budget deficit spiralled to 12.7 per cent of gross domestic product (GDP) last year – more than four times the European Union’s limit – and has prompted fears it could destabilise the entire eurozone.
Meanwhile Fitch Ratings raised concerns that the size of the UK’s own debt is making it vulnerable.