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Greek rescue deals not enough
by Juergen Baetz Associated Press
Oct 21, 2011 | 493 views | 0 0 comments | 3 3 recommendations | email to a friend | print


BERLIN (AP) — Greece’s international creditors warn that a second rescue package tentatively agreed upon in July may not be enough to save the country from bankruptcy, but believe Athens should nevertheless get its next batch of bailout loans, according to a draft report obtained Thursday by The Associated Press.

Although the debt inspectors said Greece has missed its deficit-cutting targets and that the pace of its reforms is insufficient, they said Athens should get €8 billion ($11 billion) of bailout loans as soon as possible so the country does not default on its debts next month.

Greece has been relying on a €110 billion ($152 billion) package of rescue loans since May last year. In July, eurozone leaders tentatively agreed on a second €109 billion bailout that would also see banks and other private bondholders give Greece easier terms on its debt.

However, the inspectors from the European Commission and the European Central Bank said Greece’s debt remains “extremely worrying.”

Even though the second bailout package would reduce Greece’s financing needs in coming years, it “could not suffice for the debt dynamics to be described as sustainable” if implementation the reforms program remains weak, the report said.

Emphasizing the uphill struggle faced by the Greek government, violent protesters in Athens on Thursday attacked peaceful ones with firebombs and stones ahead of a parliamentary vote on expanding reviled austerity measures.

As the second day of a general strike paralyzed the country, more than 50,000 peaceful demonstrators flooded downtown Syntagma Square in protest.

But they came under repeated attacks by hundreds of masked protesters in motorcycle helmets who threw gasoline bombs and chunks of marble into the crowd. Chaos ensued as the Communist party supporters went on the counterattack and riot police fired tear gas to separate the two sides.

At least ten people were treated by medics, mostly for facial cuts, but two had serious head injuries.

The escalating tensions and the debt inspectors’ report pile pressure on European leaders to act decisively at a key summit on Sunday.

Markets are expecting a three-pronged deal to help ailing banks, boost the bailout fund and lighten Greece’s debt load.

The European Commission, the EU’s executive, had been pushing for the second rescue package for Greece to be finalized this weekend to remove the uncertainty hanging over the country that has hit stock markets in recent weeks.

But according to draft conclusions for the summit obtained by the AP, leaders say “we look forward to the conclusion of a sustainable and credible new EU-IMF multiannual program by the end of November.”

The sentence is still in brackets, suggesting that the timing and content of the second bailout is still under discussions.

The fact that debt inspectors believe that deal will not be enough to help Greece underlines the urgency EU leaders face in making private creditors like banks take bigger losses on the Greek bonds they hold.

In the second bailout deal, private bondholders renounced on about 21 percent of the money they are owed. But even with those terms, Greece’s debts would spiral to above 180 percent of economic output next year, European officials have said.

To give Greece more relief, Germany and other rich countries want banks and other financial institutions to take losses of 50 or 60 percent on the bonds they hold, according to European officials.

“Debt sustainability has effectively deteriorated, given delays in the recovery, in fiscal consolidation and in the privatization plan, as well as the perspective of bank recapitalizations,” the report noted.

How to deal with Greece and how to contain Europe’s 20-months-old sovereign debt crisis will be the top issue at the meetings of finance ministers and leaders in Brussels this weekend.

The report, sent to German lawmakers Thursday, said the reform efforts by the Greek government are “very large,” but targets for September “appear to have been failed by a small margin.”

As Greece’s economy keeps shrinking, its debt burden — measured as a percentage of GDP — keeps mounting, and no improvement appears to be in sight.

The debt inspectors said Greece’s recession “is substantially deeper than previously projected” as the country implements its austerity measures. Economic activity was 6 percent below its level a year ago in the first six months, they said, with the overall contraction for 2011 estimated to be a steep 5.5 percent.

The unemployment rate is hovering around 16 percent this year and will increase further to a “historical peak” of 17 percent, it said.

The deterioration of the economic activity will make policymaking more challenging, the report acknowledged. “Given the scale of the required reforms, political coordination inside the government and consensus in the whole Greek society remain as essential and decisive as ever,” it said.

The report is expected to be followed soon by a separate review by the International Monetary Fund, another creditor and part of the so-called troika.

The troika had demanded more austerity measures before giving Greece the next batch of bailout loans.

The Greek government won initial approval for those measures in a first vote Wednesday night, and deputies are now to vote on the details. They include putting 30,000 public servants on reduced pay and suspending collective labor contracts.

The measures are expected to pass, although dissent from governing Socialist party deputies could further weaken Prime Minister George Papandreou’s slim majority in Parliament, where he holds 154 of the legislature’s 300 seats.

The debt inspectors’ report makes it clear that despite protests and public anger, the new measures have to be thoroughly implemented to meet next year’s targets.

“The 2011 government deficit will most likely be between 8.5 and 9 percent of GDP,” well above the targeted ceiling of 7 3/4 percent of GDP, or €17 billion, they said.
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