Greek Prime Minister George Papandreou has asked for the activation of an aid package from the European Union and International Monetary Fund aimed at pulling the eurozone member out of a debt crisis.
‘It is a national and imperative need to officially ask our partners in the EU for the activation of the support mechanism we jointly created,’ Mr Papandreou said in statements broadcast live.
With national debt of almost 300 billion euros and a risk premium that reached 590 basis points yesterday, Greece faces a fiscal mess that threatened to spread to Spain and Portugal, forcing the EU to set up a standby aid facility. At stake is the future of the euro 11 years after its creators gave the European Central Bank responsibility for interest rates while leaving fiscal policy in national capitals.
Yesterday yields on Greek 10 year bonds spiked to almost 9% on news that their fiscal deficit was much worse than the government had claimed. Reacting to that news German paper Bild responded angrily –
Europe has been stunned by more shock numbers revealing the debt crisis in Greece is even worse than first thought.
Greece is being swallowed by a debt spiral – and the bad news is that Germany could be pulled in along with it!
Now it turns out that the Greeks will need a lot more, presumably over €80bn. As a consequence, Germany’s portion will rise accordingly.
And how do the Greeks themselves respond? They strike!
Goldman Sachs said it is expecting Greece to offer some sort of “voluntary debt-restructuring” to creditors over coming months. Erik Nielsen, the bank’s Europe economist, said the rescue formula may evolve into a mixture of loans and debt forgiveness in order to give Greece “a much longer breathing space”.
City bankers are bracing for a possible haircut of up to 50pc on €270bn (£235bn) of Greek sovereign debt, hoping that any losses will be split between creditors and some sort of EU resolution fund.
With potentially devastating knock-on effects –
Any talk of Greek restructuring is potentially dangerous. “It would cause massive [bond] spread turmoil in other peripherals if a troubled EMU member was not even given the chance to put its consolidation plans into practice,” said Marcel Bross, of Commerzbank.
Suki Mann, of Societe Generale, said such a move would be a major headache for Portugal, Spain and Ireland. “In extremis, this could lead to debt restructuring in these countries too,” he said.