Greek PM asks for aid

 

Greece asked European governments and the IMF on Friday to trigger billions of euros in emergency loans in what could be the largest state bailout ever attempted.

Prime Minister George Papandreou asked for the 45 billion euro (38.96 billion pound) package put together by the European Union and International Monetary Fund to be activated after months of markets pushing Greek borrowing costs ever higher, undermining the country's efforts to cut its 300 billion euro debt load.

"It is imperative that we ask for the activation of the mechanism" Papandreou said on live national television and radio from the remote Aegean island of Kastellorizo.

European markets rallied on the announcement but investors quickly concluded that the long-awaited bailout would only provide a short-term solution to the Greek debt crisis.

After bouncing initially, the euro slipped to 1.3305.

But the premium investors demand to buy Greek 10-year government bonds rather than euro zone benchmark Bunds tightened to 530 basis points versus 611 basis point at its peak on Thursday.

"This certainly does not mark the end of the crisis, there's still much further to go. They've still got the medium-term problems of getting their public finances in order, and obviously the issue of competitiveness" said Ben May, European economist at Capital Economics.

Time is pressing, with Greece needing assistance before it has to redeem an 8.5 billion euro bond on May 19.

Euro zone officials said it could take a week for the European Commission and European Central Bank to decide if the request was valid and for euro zone finance ministers then to take a formal decision.

"There are no deadlines," Commission spokesman Amadeu Altafaj told a regular news briefing.

Some investors had expressed exasperation with the socialist government which, caught between punishing market forces abroad and Greek workers fearful of painful austerity measures, was hesitant to ask for help.

DOUBTS

Greek bond yields hit 12-year highs on Thursday as doubts about its ability to avoid default intensified when European Commission data showed its large public deficit was even worse than feared and Moody's Investors Service downgraded its rating of Greek government debt.

The budget figures were announced as tens of thousands of Greek nurses, teachers and other public workers staged a one-day strike against the government's austerity measures.

Athens still faces some opposition in Germany, where a majority of voters are against helping the long-time budget offending country against the backdrop of a key state election on May 9.

In the runup to the vote, German political parties have expressed resistance to approving the aid in a required parliamentary vote, but senior officials said on Friday it should not jeopardise the rescue package.

"Because Greece would not need all the aid immediately, the International Monetary Fund could supply the first tranche if necessary" a member of the ruling coalition said, speaking on condition of anonymity. "Then European governments could step in depending on how quickly they can approve aid nationally."

Another question is whether the 30 billion euros pledged by euro zone states and 10-15 billion more from the IMF would be enough to cover the 39 billion euros in debt Greece has coming due in the next 12 months, plus other costs forecast in the 2010 budget deficit.

Papandreou, who won an election last year pledging to tax the rich and support the poor, has come under increasing pressure,

A poll showed on Friday his support was declining and that Greeks fear the aid package will hit their living standards.

After winning power last October, his government suddenly announced Greece's 2009 budget deficit would be twice as big as a previous estimates - and four times the EU ceiling.

Debt-stricken Greece appealed to its European partners and the IMF for emergency loans on Friday, yielding to overwhelming market pressure to set in motion the first financial rescue of a member of the euro zone.

Prime Minister George Papandreou requested the 45 billion euro (38.96 billion pound) package after a months-long selloff by investors pushed borrowing costs to record levels and undermined Athens' efforts to cut its 300 billion euro debt pile.

"This is the moment. The time that was not granted to us by the markets will be given to us by the support of the euro zone" Papandreou said in a statement broadcast live from the remote, tiny Aegean island of Kastellorizo.

"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."

European markets rallied briefly on the announcement but investors said the long-awaited bailout, which could be the largest multilateral rescue of a country ever attempted, would only provide a short-term solution to Greece's debt crisis.

After an initial bounce, the euro was a just touch higher at $1.3308 at 12:40 p.m. British time, up 0.1 percent on the day.

The premium investors demand to buy Greek 10-year government bonds rather than euro zone benchmark Bunds tightened to 525 basis points, versus 611 on Thursday, before rebounding back to 570.

The request followed growing doubt from investors that Greece could avoid default and market exasperation at Papandreou's socialist government which, torn between punishing market forces abroad and Greek workers protesting at painful austerity measures, was hesitant to ask for help.

The last straw came on Thursday, when European Commission data showed Greece's 2009 public deficit was even higher than feared at 13.6 percent of gross domestic product, complicating Athens efforts to slash that figure by almost a third this year. That drove Greek bond yields to 12-year highs, making the cost of borrowing prohibitive.

"This certainly does not mark the end of the crisis, there's still much further to go" said Ben May, European economist at Capital Economics. "They've still got the medium-term problems of getting their public finances in order, and obviously the issue of competitiveness."

TIMING IN FOCUS

Athens continued talks with the European Commission, the European Central Bank and the International Monetary Fund on Friday on a three-year programme that includes the aid package. But time is pressing, with an 8.5 billion euro bond due to mature on May 19.

Economists say a rescue is likely to require further European and IMF aid in 2011 and 2012 and some forecast that Greece will have to restructure its foreign debt. French and German banks are among the biggest holders of Greek debt.

Finance Minister George Papaconstantinou is due to travel to Washington for the IMF's annual meeting on Saturday. Greek media said he could ask for IMF board to vote on a deal then, but the Fund has said consultation could take two or three weeks.

It could take a week for the Commission and ECB to decide if Greece's request is valid and for euro zone finance ministers to then take a formal decision, the Commission said.

"Everything is going to be done in such a way that the mechanism can be triggered as soon as (necessary) and as is necessary for Greece" spokesman said Amadeu Altafaj said.

He said interest on the loans - expected to be around 5 percent from euro zone states - would be in line with a formula worked out by euro zone finance ministers earlier this month. Because the date of the disbursement was not known yet, it was impossible to say now what the exact level would be.

Greece has said the Commission could potentially offer a bridge loan to fill a gap if the aid were not approved in time to cover its funding needs.