Greece accepts savage bailout

Greece
accepted an unprecedented bailout from the European Union and International
Monetary Fund valued at more than 100 billion euros (US$133 billion) to prevent
default, agreeing to budget cuts that the civil service union called “savage.”

The
measures are worth 30 billion euros, or 13 percent of gross domestic product,
and include wage cuts and a three-year freeze on pensions, Finance Minister
George Papaconstantinou said in Athens Sunday.

Greece’s
main sales tax rate will rise to 23 percent from 21 percent. The exact bailout
amount will be announced later, he said.

“Greece
will be shielded from the international markets and will be able to put its
house in order,” Papaconstantinou said in Athens before heading to the EU in
Brussels Sunday.

Prime
Minister George Papandreou said “avoiding bankruptcy is a national red line”
and the agreement would demand big sacrifices from Greeks to avoid catastrophe.

Policymakers
are trying to prevent a Greek default as its fiscal crisis shows signs of
spreading through the euro region. The agreement, following 10 days of talks
and protests, comes after a surge in Greek borrowing costs left the government
struggling to finance its debt and investors speculating that Portugal and
Spain could also suffer their fate.

Daily Attacks

The
bailout plan will give Greece time to fix its budget before returning to the
market, which it wants to do as soon as possible, Papaconstantinou said.

“We
want to implement our plan without the daily attacks of markets on Greek
bonds,” he said. Other measures include abolishing the 13th and 14th wage
payments that civil servants get annually for workers earning more than 3,000
euros per month, he said. Payments for those earning less than that will be
capped at 1,000 euros, he said.

About
two-thirds of the funds will come from Greece’s 15 euro-area partners, which
must still sign off on the disbursement by a unanimous decision. The European
Commission said Sunday it approved of Greece’s request for aid. The
International Monetary Fund will provide the rest of the funds.

The
financial lifeline will last three years and will force Greece to cut its
budget deficit below the EU’s limit of 3 percent of gross domestic product by
the end of 2014. That’s one year later than originally planned. The shortfall
was 13.6 percent in 2009.

‘Deep, deep recession’

The
scale of the budget cuts has prompted some economists to speculate that Greece
will have to restructure its debt because the strains placed on the economy
will be too great. The government now expects the economy to shrink 4 percent
this year and 2.6 percent in 2011 before expanding 1.1 percent in 2012 and
almost double that in the following two years. In January it forecast a 0.3
percent contraction for 2010.

“There
is a very real possibility that at the end of two or three years, Greece will
still have an unsustainable debt and will have to restructure because it will
have a deep, deep recession in the meantime,” said Barry Eichengreen, economics
professor at the University of California, Berkeley.

“We
find ourselves before the most savage, unprovoked and unjust attack,” Spyros
Papaspyros, head of the ADEDY civil servants union said last week after seeing
an outline of the cuts.

At
stake is the future of the euro 11 years after its creators left fiscal policy
in national capitals. As the Greek talks dragged on this past week, bonds
dropped across Europe on investors’ concern that Portugal and Spain will also
struggle to cut their deficits.

Contagion risk

The
extra yield that investors demand to hold Portuguese debt over German bunds
surged to 298 basis points on April 28, the most since at least 1997. The Greek
premium touched 827 points. The spread on Spain climbed to the highest since
March 2009. Standard & Poor’s followed its decision to cut Greece’s credit
rating to junk on April 27 was followed by downgrades on Portugal and Spain.

“After
the immediate relief, however, the focus will be squarely on implementation
risk in Greece and I believe Portugal, and probably Spain, will need to put on
the table a stronger fiscal effort to avoid coming under renewed pressure in
the coming weeks and months,” said Marco Annunziata, chief economist at
UniCredit Group in London.

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