Greece told to get tough in exchange for emergency aid

Governments demand austerity measures before bailout money is handed over.

Eurozone governments are demanding that Greece agrees to tough economic reforms over the next two years in exchange for receiving €45 billion in emergency loans. They say that additional austerity measures are necessary both to convince financial markets that Greece can be saved from default, and to win parliamentary approval for granting aid.

Wolfgang Schäuble, Germany’s finance minister, told the newspaper Bild Zeitung this weekend that the German parliament’s acceptance of the Greece’s request for aid depends on the country’s willingness to accept “strict austerity in the coming years”.

Christine Lagarde, France’s finance minister, told French paper Le Journal du Dimanche: “We want to stabilise [Greece] but that doesn’t prevent us from being firm”.

She said that the eurozone would apply strict “control measures” to “make sure we don’t fall into a bottomless pit”. France, Germany and the Netherlands must obtain parliamentary approval to provide Greece with emergency loans.

Olli Rehn, the European commissioner for economic and monetary affairs, has also called on Greece to prepare “additional” economic reforms to those in its current budget consolidation plans. Rehn said that Greece had not offered enough detail on reforms it plans to implement in 2011-12.

George Papandreou, Greece’s prime minister, on Friday requested financial support from the eurozone and International Monetary Fund to avoid paying punitively high interest rates to raise funds on financial markets. Papandreou said that speculation had made it impossible for Greece to finance its debt. Activating the loan facility was a “pressing necessity”, he said.

The Greek government is lobbying for a quick release of aid money, and is seeking to play down the possibility that the request could be rejected. George Papaconstantinou, Greece’s finance minister, yesterday met Jean-Claude Trichet, the president of the European Central Bank, Dominique Strauss-Khan, the director-general of the IMF, and Rehn in the margins of the IMF’s spring meeting, in Washington, to discuss the terms that would apply to receiving aid.

Papaconstantinou said after the meeting that he was “confident” that the money would be released in time to save Greece from default. He said that early May was “a good ballpark” figure for when this would happen.

“The IMF, the European partners and everyone involved in the financing effort recognise the need for speed,” Strauss-Kahn said. “I am confident that we will conclude discussions in time to meet Greece’s needs.”

Officials from the IMF, the European Commission and European Central Bank have been in Athens since last week to discuss the conditions that will apply to financial support.

Markets have so far reacted cautiously to the possibility of a Greek rescue. Yields on Greek ten-year bonds were at 8.73% on Friday, close to a record high of 8.92% that was reached the previous day.

Ministers agreed on 11 April to set up an emergency loan facility, funded jointly by the eurozone and IMF, as a response to Greece’s debt crisis. It would provide finance to Greece at rates substantially lower than it is currently paying on the markets. The programme is expected to last for three years, with the eurozone providing around two-thirds of the total support. The facility’s budget for 2010 is around €45 billion.

Greece’s situation was discussed in the margins of both the IMF spring meeting, and a meeting of G20 finance ministers that took place on Friday (23 April). The meetings were otherwise notable for a disagreement between countries on the merits of placing a tax or levy on the banking sector.

The IMF proposed, in a report leaked last week, that banks should be forced to make a “financial stability contribution” that would be used to cover the costs of future bank bail-outs, and a separate “financial activities” fee that would be applied to banks in a similar way to value-added tax. The proposals have been welcomed by the US, France, Germany and the UK, but are strongly opposed by Canada, Japan and Australia, which fear that they would place too great a burden on the financial sector, and harm the global economic recovery. G20 finance ministers said in their communiqué that the IMF should do “further work” before a summit of G20 leaders in June.

G20 finance ministers also reaffirmed their goal of overhauling bank capital-requirements by the end of 2012.

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