European Leaders Agree to Give Greece New Bailout with New Round of Austerity Measures

European leaders to give Greece another 120 billion euros ($170 billion; £105 billion) of support. The money will come from the 17 eurozone countries and the International Monetary Fund (IMF). There will be contributions from other lenders and fund-raising and cuts within Greece.

Greece Presses Banks, Low-earners in Debt Crisis

June 23, 2011

AP – Greece's beleaguered government said Thursday it will start taxing minimum-wage earners and encourage local banks to help the state delay debt payments for bonds maturing as late as 2015.

Evangelos Venizelos, the country's new finance minister, also said the government is encouraging a deferment scheme under the so-called "Vienna initiative," signing up private investors to voluntarily renew their debt holdings as they expire.

The next big challenge for Greece is to have parliament approve a new round of austerity measures before getting the vital next batch of loans, worth euro12 billion, out of its euro110 billion rescue fund from eurozone countries and the International Monetary Fund.

Venizelos predicted Thursday that the two-stage vote on June 28 and 30 would be successful, and he met with EU and IMF debt inspectors to discuss details of the new austerity plan worth a total of euro28 billion. The two sides reached broad agreement on the package late Thursday, the European Commission said in a statement.

"These measures, once fully implemented, will enable Greece to meet the agreed targets (in its bailout program) and remain on track," the statement said.

Voluntary bond rollovers were used successfully in 2009 to help East European countries during the global financial crisis. But Athens runs the risk that a similar move may be considered a default by ratings agencies, because it will likely involve banks charging interest rates that are significantly lower than what they would currently get on Greek bonds bought on the open market.

"The Vienna process is totally voluntary," Venizelos said. "Are we encouraging the Greek banks to participate? The answer is yes."

Asked what bond maturities would be considered in the voluntary process, he said:

"They may include 2015."

A Greek default could drag down Greek and European banks, endanger weak eurozone countries like Portugal, Ireland and Spain, and potentially spark turmoil in global markets, the European Central Bank has warned.

Greece's creditors are demanding it pass the new round of austerity measures before getting the euro12 billion in loans from the eurozone, IMF rescue fund. Venizelos promised to have the package passed by June 30, even though negotiations are still under way on a euro5.5 billion portion with rescue lenders.

With more cuts still to be announced, Venizelos said the country's tax threshold would be lowered from euro12,000 to euro8,000 ($27,000 to $11,335) — meaning most Greeks on a minimum wage of euro739 ($1,050) per month would have to start paying income tax.

The new measures promoted Greece's largest union, the GSEE, to call a 48-hour strike next Tuesday and Wednesday.

On Thursday, more than 3,000 officers from the police, coast guard and fire service — most wearing their uniforms — protested in central Athens against the cuts in a rally to parliament.

"Police get the worst wages in the public sector. We can't make ends meet," 45-year-old police Sgt. Athanasios Kritsilas from the northern town of Drama, told the AP. "We don't want anymore cuts, we're already at rock bottom, we can't get any lower."

Greece's Socialist government has so far faced down dissent in its own party, violent protests and a national wave of discontent. It survived a confidence vote Tuesday by insisting it must insure the country's national debt remains viable.

With borrowing costs still prohibitive, Greece is likely to require a second bailout package next year to cover its financing needs. Many economists remain convinced the country will have to restructure its debts in some way in the coming years, especially if the economy shrinks further.

Venizelos' talks with creditors in Athens came as European Union leaders met in Brussels for a summit expected to be dominated by the Greek crisis. They were expected to reinforce their message of fiscal austerity to Prime Minister George Papandreou.

Papandreou is to meet with German Chancellor Angela Merkel, French President Nicolas Sarkozy, EU President Herman Van Rompuy and European Central Bank President Jean-Claude Trichet.

Quick Guide to the Greek Crisis

June 23, 2011

Reuters - A debt crisis in Europe's single currency zone has entered a critical phase with fears Greece could default and spark a global financial disaster like that followed U.S. investment bank Lehman Brothers' collapse in 2008.

LATEST DEVELOPMENTS

European Union leaders are meeting on Thursday and Friday and will try to convince Greeks and financial markets that they have a workable plan to help Athens avoid a debt default and return to financial stability.

European Central Bank Executive Board member Juergen Stark told Austrian newspaper Kurier:

"After more than three years of fire-fighting we are certainly at the point where more and more rescue measures would be fatal without structural adjustments in the financial system and economic policy."

U.S. Federal Reserve Chairman Ben Bernanke said on Wednesday:

"If there were a failure to resolve that situation (with Greece), it would pose threats to the European financial system, the global financial system, and to European political unity, I would conjecture, as well."

WHAT'S NEXT?

* June 28 - Greek parliament to vote on a 28 billion euro five-year austerity package agreed with the European Union and International Monetary Fund.

* Main labor unions to launch 48-hour strike on day of austerity vote.

* July 3 - Deadline set by EU for Greek parliament to pass laws implementing the austerity package, including on privatisations, tax rises and spending cuts. Euro zone finance ministers hold an extraordinary meeting the same day and have said Greece must pass the laws by then to obtain its next 12 billion euro tranche of bailout loans.

* Mid-July - Point by which Greece has said it will be unable to pay its debts if it does not get the new loan tranche.

WHAT'S THE PROBLEM?

Greece has a sovereign debt pile of 340 billion euros ($481.5 billion), more than 30,000 euros per person in a population of 11.3 million. The 110-billion-euro bailout Greece accepted last year from the European Union and International Monetary Fund has proved insufficient and a second package worth 120 billion euros is now under discussion. With its debt equivalent to 150 percent of annual output, Greece holds two unwanted world records: the lowest credit rating for a sovereign state, and the most expensive debt to insure. Its people have lost patience with an ever-deepening austerity drive that has slashed public sector wages by a fifth and pensions by a tenth.

Around 53 billion of the original 110 billion euro package has been paid out so far. The government estimates that Greek debt will reach about 350 billion euros at the end of this year, taking in EU/IMF aid tranches including the 12 billion euro emergency loan earmarked for July.

About 70 percent of Greece's debt is held abroad and the remainder at home. Greece is paying an average 4.2 percent interest rate on EU/IMF bailout loans.

WHY DOES IT MATTER OUTSIDE GREECE?

The longer the crisis drags on, the greater the risk that contagion will spread to other troubled euro zone economies like Ireland and Portugal, which have also been bailed out before, and Spain, which is much bigger and would be far more expensive -- perhaps too expensive -- to rescue.

A default by Greece would hammer the banks that hold its debt, including the European Central Bank and big French and German lenders. It could also prompt credit markets to freeze up, as happened after Lehman's demise when banks virtually stopped lending to each other.

The White House said on June 16 the Greek crisis was acting as a headwind to the U.S. economy but opinions vary as to the level of exposure of U.S. banks.

A Greek default would be a catastrophe and a humiliation for the European Union, which launched the euro in 1999 as its most ambitious project and a symbol of the continent's unity. It has prompted some commentators to think the unthinkable: that the euro zone might break up, either by the expulsion of Greece or the departure of Germany, the EU's paymaster, which might be tempted to return to its own currency.

SO WHY NOT JUST BAIL GREECE OUT AGAIN?

The EU's big players -- notably Germany, France and the European Central Bank -- have struggled to work out a rescue mechanism. European governments are keen to avoid a "hard default" because this could threaten banks throughout the euro zone and further afield.

They are therefore discussing a "soft landing" in the form of a debt extension or voluntary rollover by creditors, but some of the proposals have been criticized as a default by another name.

WHO ARE THE KEY PLAYERS?

Greek Prime Minister George Papandreou last week reshuffled his government to quell dissent in his ruling Socialist party and gave the finance portfolio to Evangelos Venizelos, a party rival. Venizelos is a political heavyweight who ran the preparations for the 2004 Athens Olympics, but has no economic track record. Papandreou's government won a confidence vote in parliament on June 22.

At the European level, the single most influential figure is German Chancellor Angela Merkel, as head of the EU's biggest economy. Merkel, who is losing popularity and has suffered a string of defeats in state elections, is under intense pressure from a German public that resents footing the bill for what is widely seen as Greek profligacy -- hence her insistence that banks should share some of the pain. Merkel has been accused of holding up the second Greek aid package, further eroding investor confidence, which could make the bailout more expensive.

WHAT ABOUT THE GREEK PEOPLE?

Public disgruntlement over austerity -- including curbs on widespread early retirement, tax rises and cuts in benefits and wages -- has erupted into frequent strikes and protests, some of them violent. Unemployment is rising. In a poll last month, 80 percent of people said they refused to make any more sacrifices to get more EU/IMF aid. Bank and utility workers, public sector contractors and even doctors have taken to the streets. Private sector workers blame the bloated public sector, civil servants blame tax cheats and many Greeks blame corrupt politicians for the country's problems.

HOW DID IT COME TO THIS?

Greece, whose economy had grown strongly but suffered problems with corruption and bureaucracy, joined the euro zone a decade ago, linking its economy to other European countries.

It went into recession in 2009 after 15 years of growth and its budget deficit hit 15.4 percent of GDP after a series of revisions by the government which revealed the country's economy was in far worse shape than it had previously admitted.

Chronic problems include rampant tax evasion -- the labor minister has estimated a quarter of the economy pays nothing.

More broadly, the Greek crisis reflects an inherent weakness in the euro's structure -- a currency zone with a "one size fits all" interest rate for a set of widely divergent economies, and 17 different countries running their own fiscal policies.

How the crisis plays out will determine the failure or survival of the project.

Greece in Deal with EU/IMF on Austerity Plan

June 23, 2011

Reuters - European Union leaders promised more money to help Greece stave off looming bankruptcy, provided its parliament enacts an austerity plan finalized in fraught last-minute talks with international lenders.

Greek Prime Minister George Papandreou promised to push through radical economic reform after his new finance minister clinched agreement with EU and IMF inspectors on extra tax rises and spending cuts to plug a 3.8 billion euro funding gap.

"A comprehensive reform package... and adoption by the Greek parliament of the key laws on the fiscal strategy and privatization must be finalized as a matter of urgency in the coming days," EU leaders said in a summit statement.

"This will provide the basis for setting up the main parameters of a new program jointly supported by its euro area partners and the IMF and allow disbursement in time to meet Greece's financing needs in July," the 27 leaders said.

The euro rebounded against the dollar and U.S. stocks pared losses on news of the agreement in Athens.

Greece needs 12 billion euros in European and IMF aid to avoid a default on its debt mountain in mid-July that could spread contagion across the euro currency area and send shock waves around the world economy.

"Greece is committed, strongly committed, to continue a very important program for major changes, radical changes, to make our economy viable," Papandreou told reporters.

The EU leaders also exhorted conservative Greek opposition leader Antonis Samaras to rally behind the austerity program, but he stuck to his refusal to vote for the entire plan, saying he would support the spending cuts but not tax increases.

German Chancellor Angela Merkel, who has taken perhaps the toughest line on Greece, urged the Greek opposition to do what was necessary and get behind the package.

"In such a situation, everyone must stand together in a country," she said.

Euro zone governments are meanwhile talking to banks and insurance companies to convince them voluntarily to maintain their exposure to Greek debt when their bonds mature, as part of a second rescue package for Athens.

RESCUE FUNDS APPROVED

The leaders also approved the creation of a permanent euro zone bailout fund from June 2013 as well a strengthening of the existing temporary rescue fund.

Investors remain skeptical. Five-year credit default swaps on Greek government debt rose 138 basis points to 2,025 bps on Thursday, according to data monitor Markit, implying a more than 80 percent probability of default over that period.

A Greek default would force European banks and governments to take big losses, undermine the creditworthiness of other stressed euro zone sovereigns and potentially plunge the economy of the world's biggest trading bloc, already slowing, back into recession.

Economists say even a second bailout plan for Greece may buy its government only a few months' respite and most expect Athens will have to default or write down its debt eventually.

Greece accepted a package of 110 billion euros of EU/IMF loans in May 2010 and now needs a second bailout of a similar size to meet its financial obligations until the end of 2014, when it hopes to return to capital markets for funding.

Euro zone member states, led by Germany, insist any second aid package must involve the private sector. But credit rating agencies have said they would treat even a voluntary debt rollover as a selective default.

At meetings this week, banks and insurers in Germany, France, Spain, Belgium and the Netherlands were asked by national financial authorities to roll over their holdings of Greek debt when the bonds mature.

EU Eases Greek Access to EU Development Funds

June 23, 2011

AP – The European Union said Thursday it would help Greece access billions of euros in EU development funds in an attempt to boost the country's struggling economy and sweeten unpopular austerity measures ahead of a tight parliamentary vote.

European Commission President Jose Manuel Barroso said the EU was prepared to reduce the amount of money Greece has to come up with to co-fund projects under its regional funds to 15 percent, from the usual 50 percent. The Commission, which manages the funds, and other EU member states will also set up a program of technical assistance to make sure debt-laden Greece uses the money to stimulate economic growth and create new jobs.

The EU funds are designed to help underdeveloped regions catch up with richer parts of the 27-nation bloc. About euro15 billion ($22 billion) is still available for Greece until 2013, but the country has been struggling to prove it can use the funds well and come up with matching financing.

EU leaders hope that the prospect of some EU funds — which, in contrast to the rescue loans Greece has been receiving for the past year, do not have to be repaid — will offer some hope to Greek citizens who have been suffering through a steep economic recession and unemployment above 16 percent.

The Greek debt crisis, which has already spilled over into Ireland and Portugal and threatens to take a larger toll on the 17-country eurozone, has reached a new boiling point in recent weeks. Barely one year after first being granted euro110 billion in rescue loans from other eurozone countries and the International Monetary Fund, it has become clear that Greece will need tens of billions more to avoid defaulting on its massive debts in the coming years.

But eurozone governments have blocked a final deal on a new aid package — as well as the payment of a crucial euro12 billion installment of the existing bailout — until the Greek parliament passes euro28 billion in additional spending cuts, tax increases, economic reforms and public asset sales. The new measures, which will allow Greece to meet the deficit targets set out in its bailout program, have sparked sometimes violent protests and been strictly opposed by the conservative opposition party.

In their statement Thursday night, the leaders said the comprehensive package of reforms "must be finalized as a matter of urgency in the coming days" for the new funds to be disbursed. Earlier in the day, they also piled pressure on Greek opposition leader Antonis Samaras, who was in Brussels for a meeting of European conservatives, to back the new measures.

"We call on the opposition to fulfill its historical responsibility," German Chancellor Angela Merkel said as she arrived at the summit.